Vaiva-Economics Part

Economics Part
MICROECONOMICS
🌸DEFINITION OF ECONOMICS:
• Economics is a social science concerned with the production
distribution and consumption of goods and services.
• Economics is a science which studies human behaviors as a
relationship between ends and scarce means which have alternative
uses.
• Economics is the study of mankind in the ordinary business of life.
[Economics is a science that deals with the problem of societies
unlimited wants that are to be met with the use of scarce resources.]
💐BASIC PROBLEMS OF ECONOMICS:

1.Scarcity (limited amount of resources)
2.Choice
Three interrelated problems are generated from these two problems:
i. what to produce
ii. how to produce
iii. for whom to produce
Father of Economics: Adam smith

Father of Modern Economics: Paul Samuelson
Ragnar Frisch-- Divided Micro Macro Economics
Farukabdullah.iiuc.bd@gmail.co
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🌸PRODUCTION POSSIBILITY CURVE:
PPC is a graphical representation of all the possible combinations of
two goods which an economy can produce with available technology
and full an efficient use of its given resources.
It is downward sloping and concave to the origin.
🌺OPPORTUNITY COST:
opportunity cost is the next best alternative foregone to perform an
economic activity.
EFFICIENCY:
Efficiency is concerned with the optimal production and distribution of
scarce resources.
Production Efficiency:
Production efficiency is concerned with producing goods and services
with the optimal combination of inputs to produce maximum output
for minimum cost.
ECONOMIC SYSTEM:
1.Capitalistic Economy
2.Socialistic Economy
3.Mixed Economy
4.Islamic Economy
🌺 MICROECONOMICS VS MACROECONOMICS:
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1.Microeconomics deals with the individual behavior of economic
variables. On the other hand, Macroeconomics deals with overall
behavior of variables.
2.Demand for a good or supply of a good, price of a good, income of a
consumer are the example of microeconomics concepts. Aggregate
demand, aggregate supply, and national income are the
macroeconomics concepts.
Study Of Microeconomics Involves Several Key Areas:

1.Demand, supply and equilibrium
2.Elasticity
3.Theory of production
4.Cost of production
5.Perfect competition
6.Monopolistic competition, monopoly and oligopoly
🍂 DEMAND:
Consumer Willingness to purchase a good at a certain price.
Characteristics of Demand:
1.willingness to get goods
2.Ability to pay
3.Interested to pay money
Demand Law:
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Other things remaining constant, A rise in price leads to a fall in
quantity demand and a fall in price leads to a rise quantity demand.
Relationship: Inverse/ indirect relationship between price and quantity
demand.
DETERMINANTS OF DEMANND:
1.Own price
2.Price of other goods
3.Income
🍁 SUPPLY:
Supply defined as the quality of a good or a service that is sold or ready
for sale at a certain price.
Law Of Supply:
Other things remaining constant a rise in price leads to a rise in quantity
supplied and vice-versa.
Relationship: Supply curve shows direct/positive relationship between
price and quantity of supply.
Supply curves slopes upward.
Determinants of Supply:
1.Price of goods
2.Prices of factors of production
3.Technology
4.Weather
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EQUILIBRIUM:
Equilibrium defined as the equality between quantity demand and
supply.
Excess Demand= price will rise
Excess Supply= price will fall
🌳Utility:
The amount of happiness or pleasure created through the consumption
of a good or service is called utility.
🌲Total utility:
Amount of satisfaction obtained from the consumption of a certain
quantity of good or a service is called total utility.
🌱Marginal Utility:
Change in total utility due to one unit change in consumption is called
marginal utility.
🌷Law of Marginal utility:
marginal utility decreases with successive increase in consumption
total utility in the beginning increases with consumption and once it
falls but marginal utility always falls. total utility curve is inverse U-
shaped and marginal utility curve slopes downward.
🌼Consumer's Equilibrium:
if the amount of marginal utility gained from the consumption of a
good or service is higher than price. (i.e., MU>p).
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🌻Price Effect:
change in equilibrium consumption due to change in price.
Price Effect = Substitution effect+ Income Effect
🌺Consumer Surplus:
It is difference between total satisfaction obtain by consumer from a
given quantity of a good or service and total expenditure made for the
goods or services.
Indifference Curve:
It is show the combination of two curve that yield equal utility to the
consumer.
💮Marginal Rate Of Substitution:
It is defined as the amount of change in consumption of one goods for
one unit change in consumption of another goods so that total utility
remains unaltered.
🌸Budget Line:
It is shows possible combinations of two goods that can be purchased
by spending given amount of money.
💐Income Effect:
A change in equilibrium level of consumption due to a change in real
income is called income effect.
🌹Price Elasticity of Demand:

The ratio between percentage change in demand and percentage
change in price is called price elasticity of demand.
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There are five types of elasticity
1.Unitarily Elastic Demand:

if percentage change in quantity of demand is equal to percentage
change in price, Demand is unitarily elastic.
2.Elastic Demand:
If percentage change in quantity demanded is larger than percentage
change in price, Demand would be elastic.
3.Perfectly Elastic:
If quantity of demand changes without any change in price, demand is
perfectly elastic.
4.Inelastic demand:
If percentage change in quantity of demand is smaller than percentage
change in price, demand is inelastic.
5.Perfectly inelastic Demand:
When demand remains completely unresponsive to price.
🌿Point Elasticity of demand:
elasticity at a certain point of demand curve is called point elasticity.
🌾Arc Elasticity:
Arc elasticity is defined over a segment of demand curve.
🌿Cross Elasticity of Demand:
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The ratio between percentage change in quantity of demand for one
good and percentage change in price of another good is termed as
cross price elasticity of demand.
🌲Income Elasticity:
Income elasticity is defined as the ratio between percentage change in
quantity of demand and percentage change in income.
🌳Determinants of Price Elasticity:
1.Nature Of goods
2.availability of substitutes
3.complementarity relation
4.Share in total Budget
5.Postponement Possibility
6.Time Span
7.Habit and addiction [page:142-143]
Isoquant:
Isoquant shows different combinations of capital and labor that
generate equal amount of output.
🍁Isocost:
Isocost embodies different combinations of capital and labor that
involve equal cost.
💐Expansion Path:
Expansion path is the locus of least cost equilibrium points generated
through expansion in output. Each point of expansion path is
characterized by the optimality condition.
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Perfect Competition: Perfect competition is a market structure in
which large number of buyers and sellers trade homogeneous units of
goods.
Characteristics of Perfect Competition:
1.large number of Buyers and Sellers
2.Homogenous Products
3.Free Entry and exit
4.profit maximization
5.No government Regulation
6.Perfect Knowledge
7.Absence of advertisement and selling activities
8.Perfect Mobility of Factor of Production
A competitive firm attains equilibrium if it can maximize profit. there

are two condition of profit maximization-
i. MR = MC
ii. slope of MR<slope of MC
🥀 Producer Surplus:
Producer surplus is the difference between total revenue and total cost
of the producer.
Producer Surplus = TR-TC
🌺Monopoly:
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A market structure characterized by a single seller, selling a unique
product in the market. In a monopoly market, the seller faces no
competition, as he is the sole seller of goods with no close substitute.
🌼Monopolistic competition:
Monopolistic competition is a market structure defined by four main
characteristics: large numbers of buyers and sellers; perfect
information; low entry and exit barriers; similar but differentiated
goods.
🌷Oligopoly Definition:
An oligopoly is a type of market structure where two or more firms
have significant market power. Collectively, they have the ability to
dictate prices and supply.
Characteristics of an Oligopoly:
1. A Few Firms with Large Market Share
2. High Barriers to Entry
3. Interdependence
4. Each Firm Has Little Market Power in Its Own Right
5. Higher Prices than Perfect Competition
🌲Cournot oligopoly model
The Cournot oligopoly model is the most popular model of imperfect
competition.
In the Cournot model, firms choose quantities simultaneously and
independently, and industry output determines price through demand.
A Cournot equilibrium is a Nash equilibrium to the Cournot model.
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🌾Stackelberg model
Stackelberg model is a leadership model that allows the firm dominant
in the market to set its price first and subsequently, the follower firms
optimize their production and price.
🍁kinked demand model
A kinked demand curve occurs when the demand curve is not a straight
line but has a different elasticity for higher and lower prices.
🍂Price Leadership
Price leadership occurs when a leading firm in a given industry is able to
exert enough influence in the sector that it can effectively determine
the price of goods or services for the entire market.
💮Existing Equilibrium:
It is requires the equality between demand and supply at a single
positive price.
🌵Unique Equilibrium:
Clearence of market at a single price.
🌺Stability of Equilibrium:
A tendency of getting back to equilibrium from disequilibrium.
🌴Excess Capacity
Excess capacity is a condition that occurs when demand for a product is
less than the amount of product that a business could potentially
supply to the market. When a firm is producing at a lower scale of
output than it has been designed for, it creates excess capacity. General
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equilibrium analyzes the economy as a whole, rather than analyzing
single markets like with partial equilibrium analysis.
🌸Types of Goods:
Normal good
A normal good means an increase in income causes an increase in
demand. It has a positive income elasticity of demand YED. Note a
normal good can be income elastic or income inelastic.
🍀Luxury good
A luxury good means an increase in income causes a bigger percentage
increase in demand. It means that the income elasticity of demand is
greater than one.
🌿Inferior good
An inferior good means an increase in income causes a fall in demand.
Examples of different types of good
Luxury good – Superfast broadband, organic luxury coffee, Netflix tv,
Porsche, a foreign holiday to Bali
Normal good – ordinary broadband, ordinary tv license, Ford Focus car,
holiday to somewhere close to where you live
Inferior good – Supermarket own brand coffee, bus travel, a day out at
theme park.
Necessity good – something needed for basic human existence, e.g.
food, water, housing, electricity.
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Complementary Goods: Goods which are used together, e.g. TV and
DVD player. see: Complementary goods
🥀Giffen good:
A rare type of good, where an increase in price causes an increase in
demand. The reason is that the income effect of a rise in the price
causes you to buy more of this cheap good because you can’t afford
more expensive goods. For example, if the price of wheat rises, a poor
peasant may not be able to afford meat anymore, so has to buy more
wheat.
🌻Veblen / Snob good:
A good where an increase in price encourages people to buy more of it.
This is because they think more expensive goods are better.
Example of Veblen / Snob good – some forms of art, designer clothes.
🌼1. Private Goods

Private goods are defined as both rivalrous and excludable. In other
words, the seller is able to prevent consumers from accessing the
product. This is most generally done through a price barrier.
Examples of Private Goods
Food, clothes, cars, fridges, watches, consumer goods
💐2. Public Goods
Public goods are characterized by two factors. First of all, they are non-
excludable, meaning we cannot reasonably prevent others for using the
good. Second of all, they are also non-rivalrous, meaning the
production of the good is not competitive.
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Examples of Public Goods
Defense, policing, law and order, flood systems, traffic lights, and roads.
🍁3. Club Goods
Club Goods are characterized by two factors. First of all, they are
excludable. This is similar to private goods such as food and clothes, in
the fact that the consumer cannot use the product unless they directly
pay for it. Consumers are therefore excluded from the market.
🌾Examples of Club Goods
Private Parks, Wi-Fi, Internet, satellite TV, private toll roads
🍂4. Common Goods
Common goods are characterized by two factors. First of all, they are
non-excludable. In other words, we cannot prevent consumers from
consuming the good.
Examples of Common Goods
Landscapes, timber, coal, and fish
MACROECONOMICS
🍃National Income:
National income means the value of goods and services produced by a
country during a financial year. Thus, it is the net result of all economic
activities of any country during a period of one year and is valued in
terms of money.
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🍀Gross National Product (GNP):
Gross national product (GNP) is an estimate of total value of all the final
products and services turned out in a given period by the means of
production owned by a country's residents.
GNP Formula
The formula to calculate the components of GNP is Y = C + I + G + X + Z.
🥀GDP:
GDP is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time,
normally a year.
🍁Per Capita GDP:
Per capita gross domestic product (GDP) is a metric that breaks down a
country's economic output per person and is calculated by dividing the
GDP of a country by its population.
🍂4 Types of GDP:
1.Real GDP:
Real GDP is a calculation of GDP that is adjusted for inflation. The prices
of goods and services are calculated at a constant price level, which is
usually set by a predetermined base year or by using the price levels of
the previous year.
2.Nominal GDP:
Nominal GDP is calculated with inflation. The prices of goods and
services are calculated at current price levels.
3.Actual GDP:
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Actual GDP is the measurement of a country's economy at the current
moment in time.
4.Potential GDP:
Potential GDP is a calculation of a country's economy under ideal
conditions, like a steady currency, low inflation, and full employment.
🌾Consumption Function:
The consumption function, or Keynesian consumption function, is an
economic formula that represents the functional relationship between
total consumption and gross national income.
🍀Keynesian consumption function:
The Keynesian consumption function expresses the level of consumer
spending depending on three factors.
Consumption function formula:
C = a + bYd (short run)
Kuznets Consumption Function:
C = bY (long run)
🍁Marginal Propensity to Consume (MPC):
The marginal propensity to consume (MPC) is the ratio of the change in
the level of aggregate consumption to a change in the level of
aggregate income. MPC refers to the ratio of change in consumption to
the change in disposable income:
🌷Average Propensity to Consume (APC):
The average propensity to consume (APC) is defined as the ratio of
aggregate or total consumption to aggregate income in a given period
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of time. APC refers to the ratio of consumption to the level of
disposable income.
🌸Deflation gap:
Represents the difference between the actual aggregate demand and
supply which is required to establish the equilibrium at full employment
level of income.
🌺Foreign income:
National income as foreign countries increase; they will demand more
goods and service including the goods they import.
💐Demonstration effect:
By emplacing relative income as a determinant of consumption the
relative income hypothesis suggest that individual and household try to
imitate or copy the consumption level of their neighbors on family in a
particular community.
🌻Ratchet effect:
Relative income hypothesis is that it suggests that when income of
individual or households falls their consumption expenditure does not
fall much
Hyperinflation: When inflation is extremely rapid.
🌺1. Relative Income Theory of Consumption:
According to Dusenberry's relative income hypothesis, consumption of
an individual is not the function of his absolute income but of his
relative position in the income distribution in a society, that is, his
consumption depends on his income relative to the incomes of other
individuals in the society. For example, if the incomes of all individuals
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in a society increase by the same percent-age, then his relative income
would remain the same, though his absolute income would have
in-creased.
🌸2. Life Cycle Theory of Consumption:
An important post-Keynesian theory of consumption has been put
forward by Modigliani and Ando which is known as life cycle theory.
According to life cycle theory, the consumption in any period is not the
function of current income of that period but of the whole lifetime
expected income.
💮3. Permanent Income Theory of Consumption:
Permanent income theory of consumer's behavior has been put
forward by a well-known American economist, Milton Friedman.
according to Friedman, consumption is determined by long-term
expected income rather than current level of income.
🌸Investment:
Investment is the value of fixed capital assets (plus stocks) produced in
an economy over a period of time – investment refers to the creation of
capital goods. Investment spending is an injection into the circular flow
of income.
💐Types of Investment:
1.Business fixed investment
2.Residential investment
3.Inventory Investment
Business fixed investment:
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Business fixed investment means investment in the machines, tools and
equipment that businessmen buy for use in further production of goods
and services. The stock of these machines or plant equipment etc.
represents fixed capital.
Residential investment:
Residential investment refers to the expenditure which people make on
constructing or buying new houses or dwelling apartments for the
purpose of living or renting out to others. Residential investment varies
from 3 per cent to 5 per cent of GDP in various countries.
Inventory Investment:
inventory investment the INVESTMENT in raw materials, WORK IN
PROGRESS and finished STOCK. In contrast to FIXED INVESTMENT,
inventories are constantly being ‘turned over’ as the production cycle
repeats itself, with raw materials being purchased, converted first into
work in progress, then into finished goods, then finally being sold.
🐞Difference between autonomous investment and induced
investment:
i. Autonomous investment refers to that investment which is
independent of the level of income in the economy. It remains constant
irrespective of the level of income in the economy.
Induced investment refers to that investment which changes as the
level of income changes in the economy.
ii. Autonomous investment is income inelastic but induce investment is
income elastic.
iii. induce investment is determined by consideration of profit on the
other hands Autonomous investment is determined by consideration of
social welfare
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🦂Keynesian Theory of Investment:
According to Keynes investment decisions are taken by comparing the
marginal efficiency of capital (MEC) or the yield with the real rate of
interest.
🌸Accelerator theory of investment:
The accelerator theory is an economic postulation whereby investment
expenditure increases when either demand or income increases. The
theory also suggests that when there is excess demand, companies can
either decrease demand by raising prices or increase investment to
meet the level of demand.
🍂Inflation:
Inflation is the rate at which the overall level of prices for various goods
and services in an economy rises over a period of time.
Inflation is the decline of purchasing power of a given currency over
time.
🍁Cost-push inflation:
Cost-push inflation results from general increases in the costs of the
factors of production. These factors—which include capital, land, labor,
and entrepreneurship—are the necessary inputs required to produce
goods and services.
🍁Demand-pull inflation:
Demand-pull inflation results from an excess of aggregate demand
relative to aggregate supply. For example, consider a popular product
where demand for the product outstrips supply. The price of the
product would increase. The theory in demand-pull inflation is if
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aggregate demand exceeds aggregate supply, prices will increase
economy-wide.
🌺Unemployment:
Unemployment is a term referring to individuals who are employable
and seeking a job but are unable to find a job.
🌼Types of unemployment
There are basically four types of unemployment:
(1) demand deficient,
(2) frictional,
(3) structural, and
(4) voluntary unemployment.
1. Demand deficient unemployment:
This is the biggest cause of unemployment that happens especially
during a recession. When there is a reduction in the demand for the
company’s products or services, they will most likely cut back on their
production, making it unnecessary to retain a wide workforce within
the organization. In effect, workers are laid off.
2. Frictional unemployment:
Frictional unemployment refers to workers who are in between jobs.
An example is a worker who recently quit or was fired and is looking for
a job in an economy that is not experiencing a recession. It is not an
unhealthy thing because it is usually caused by workers looking for a
job that is most suitable to their skills.
3. Structural unemployment:
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Structural unemployment happens when the skills set of a worker does
not match the skills demands of the jobs available or if the worker
cannot reach the geographical location of a job. An example is a
teaching job that requires relocation to China, but the worker cannot
secure a work visa due to certain visa restrictions. It can also happen
when there is a technological change in the organization, such as
workflow automation.
4. Voluntary unemployment:
Voluntary unemployment happens when a worker decides to leave a
job because it is no longer financially fulfilling. An example is a worker
whose take-home pay is less than his or her cost of living.
Frictional unemployment:
Frictional unemployment occurs as a result of people voluntarily
changing jobs within an economy.
Cyclical unemployment:
Cyclical unemployment is the variation in the number of unemployed
workers over the course of economic upturns and downturns, such as
those related to changes in oil prices.
Structural unemployment:
Structural unemployment comes about through technological change in
the structure of the economy in which labor markets operate.
Institutional unemployment:
Institutional unemployment is unemployment that results from long-
term or permanent institutional factors and incentives in the economy.
💐Money
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Money is an economic unit that functions as a generally recognized
medium of exchange for transactional purposes in an economy.
Money originates in the form of a commodity, having a physical
property to be adopted by market participants as a medium of
exchange.
🌺Functions of Money:
1.Medium of Exchange
2.Measure of value
3.Standard of deferred payment
4.Store of value
🌸IS-LM Model:
The IS-LM model, which stands for "investment-savings" (IS) and
"liquidity preference-money supply" (LM) is a Keynesian
macroeconomic model that shows how the market for economic goods
(IS) interacts with the loanable funds market (LM) or money market. It
is represented as a graph in which the IS and LM curves intersect to
show the short-run equilibrium between interest rates and output.
💮Characteristics of the IS-LM Graph:
The IS curve depicts the set of all levels of interest rates and output
(GDP) at which total investment (I) equals total saving (S). At lower
interest rates, investment is higher, which translates into more total
output (GDP), so the IS curve slopes downward and to the right.
The LM curve depicts the set of all levels of income (GDP) and interest
rates at which money supply equals money (liquidity) demand. The LM
curve slopes upward because higher levels of income (GDP) induce
increased demand to hold money balances for transactions, which
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requires a higher interest rate to keep money supply and liquidity
demand in equilibrium.
💐Tariff:
A tariff is a tax imposed by one country on the goods and services
imported from another country.
(a) Specific Tariff:
Specific tariff is the fixed amount of money per physical unit or
according to the weight or measurement of the commodity imported or
exported.
(b) Ad Valorem Tariff:
Ad Valorem is the Latin word that means on the value. When the duty
is levied as a fixed percentage of the value of the traded commodity, it
is called as valorem tariff.
(c) Compound Tariff:
The compound tariff is a combination of specific and ad valorem tariff.
The structure of compound tariff includes specific duty on each unit of
the commodity plus a percentage of ad valorem duty.
🌸Absolute Advantage:
Absolute advantage is the ability of an individual, company, region, or
country to produce a greater quantity of a good or service with the
same quantity of inputs per unit of time, or to produce the same
quantity of a good or service per unit of time using a lesser quantity of
inputs, than another entity that produces the same good or service.
🌺Comparative Advantage:
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Comparative advantage is an economy's ability to produce a particular
good or service at a lower opportunity cost than its trading partners. A
comparative advantage gives a company the ability to sell goods and
services at a lower price than its competitors and realize stronger sales
margins.
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Economics Part

💐BASIC PROBLEMS OF ECONOMICS:

Father of Economics: Adam smith

Study Of Microeconomics Involves Several Key Areas:

🌹Price Elasticity of Demand:

1.Unitarily Elastic Demand:

A competitive firm attains equilibrium if it can maximize profit. there

🌼1. Private Goods

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