Professional Documents
Culture Documents
(Weightage: 3 marks)
Rajkumar Sarda
B.E., MBA
RV-P&M &IP
9704405326
rajsarda@gmail.com
50 Hour MEP – dated 8th March 2021
Topics as per syllabus
• Microeconomics
• Consumption: Indifference Curve, Consumer Surplus, Elasticity
• Price Mechanism: determinants, individual & market demand schedules,
conditions, exceptions & limitations of law of demand
• Conditions & limitations of law of supply, highest, lowest & equilibrium price,
importance of time element
• Pricing of Products under different market condition: perfect & imperfect
competition, monopoly etc
• Factors of production and their pricing: land, labour, capital, entrepreneur and
other factors
• Theory of Rent
• Capital and interest: types of capital, gross interest, net interest
• Organisation and profit: functions of entrepreneur; meaning of profit and theories
of profit
2
Economic and Market Forces
3
Micro Economics
4
Flow of Economic Resources
Business firm
R
E FACTORS OF
S PRODUCTION
O DP
LAND 3.25
U
R
LABOUR
CAPITAL VAMSI CARS
C Rs 5 lakh
E
S ENTERPRISE
O OR
W ORGANIZATION
N
E
R
S
Consumer
household
5
Buy one Get one Free
6
'Indifference Curve'
} An indifference curve is a graph
showing combination of two goods that
give the consumer equal satisfaction
and utility. Each point on an
indifference curve indicates that a
consumer is indifferent between the two
and all points give him the same utility.
Description: Graphically, the
indifference curve is drawn as a
downward sloping convex to the
origin. The graph shows a combination
of two goods that the consumer
consumes.
} The diagram shows the U indifference
curve showing bundles of goods A and In economics, an indifference
B. To the consumer, bundle A and B are curve connects points on a graph
the same as both of them give him the representing different quantities of two
equal satisfaction. In other words, point goods, points between which a consumer
A gives as much utility as point B to the is indifferent. ... The main use of
individual. The consumer will be indifference curves is in the
satisfied at any point along the curve representation of potentially observable
assuming that other things are demand patterns for individual consumers
7 constant.
over commodity bundles.
Consumer surplus and economic welfare
8
'Producer Surplus'
Percentage change in
Elasticity quantity demanded
=
of demand Percentage
change in price
E=%ΔQ/%ΔP where Q is demand & P is price
10
Types of Price Elasticity of Demand
1. Perfectly elastic demand.
2. Perfectly inelastic demand.
3. Relatively elastic demand.
4. Relatively inelastic demand.
5. Unitary inelastic demand.
11
Elasticity of Demand
} Elasticity values
} >1 it is elastic
} Percentage change in price will result in larger percentage
change in the quantity demanded
} =1 it is unit-elastic
} <1 it is inelastic
} Demand is usually more elastic at higher prices and
less elastic with lower prices
} Elasticity and total revenue
} Price x’s quantity demanded at that price
12
Perfectly Elastic Demand Ed >∞ Perfectly Inelastic Demand Ed=0
An example of perfectly
inelastic demand would
be a lifesaving drug
that people will pay any
price to obtain.
13
Relatively Elastic Demand Ed>1 Relatively Inelastic Demand Ed<1
} When the percentage change in } More change in the price of the goods
quantity demanded is greater than the but less change in demand for the
percentage change in price, the goods.
demand is said to be elastic.
15
Determinants of Demand Elasticity
} Availability of substitutes
} The greater the availability of substitutes for a good, the greater
the good’s elasticity of demand
} Share of consumer’s budget spent on the good
} Increase in prices reduced the demand because people are not
both willing and able to purchase @ higher prices
} A matter of time
} The longer the adjustment period, the greater the consumer’s
ability to substitute
} Some elasticity estimates
} The elasticity of demand is greater in the long run because
consumers have more time to adjust
16
MEASUREMENT OF PRICE ELASTICITY OF
DEMAND
There are five methods to measure the price elasticity
of demand.
1. Total Expenditure Method.
2. Proportionate Method.
3. Point Elasticity of Demand.
4. Arc Elasticity of Demand.
5. Revenue Method.
17
MEASUREMENT OF PRICE ELASTICITY OF DEMAND
1. Total Expenditure Method
Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this
method, elasticity of demand can be measured by considering the change in price and the subsequent change in
the total quantity of goods purchased and the total amount of money spend on it.
2. Proportionate Method
This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand
is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity." It
is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method.
Formula:
Ed = A
A-M where Ed represents elasticity of demand, A = average revenue and M = marginal revenue.
5. Point elasticity method
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Price mechanism
19
Demand
} Demand indicates how much of a product
consumers are both willing and able to buy at each
possible price during a given period, other things
remaining constant (Ceteris Paribus)
20
Law of Demand
} The law of demand says that quantity demanded
varies inversely with price, other things constant.
Thus, the higher the price, the smaller the
quantity demanded.
21
Law of Demand
} Demand, wants, and needs
} Substitution effect
} The change in the relative price (the price of one good relative to the
prices of other goods) causes the substitution effect
} If all prices changed by same margin, there would be no substitution effect
} Income effect
} Money income – the number of Dollars/ Rupees you receive per
period
} Real income – measure in terms of how many goods and services you
can buy
} Diminishing marginal utility
} Marginal utility – additional satisfaction you derive from each item
} Law of marginal utility you derive from each additional item
consumed decreases as your consumption increases (example: pizza
slices)
22
Demand Schedule
23
Demand Curve for Pizza
a
15
b
Price per pizza
12
c
9
d
6
e
3
D
0
8 14 20 26 32
pizzas per week
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Individual Demand for Pizzas
(a) (b) (c)
8 8 8
Price
4 4 4
d d d
H B C
1 2 3 Pizzas 1 2 1
(per week)
25
Market Demand for Pizzas
(d) Market demand for pizzas
d + d + d = D
H B C
$12
8
Price
1 2 3 6 Pizzas
(per week)
26
Assumptions/conditions/Determinants of the
Law of Demand
} No Change in Consumer Income (Income Effect)
} No change in the prices of related goods (Substitution
Effect)
} No change in the number and composition of consumers
(Population)
} No change in the Consumer expectations of a future
price change
} No changes in Consumer tastes & preferences
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Changes in Consumer Income
28
Changes in the Prices of Related Goods
} Substitutes
} Decrease in price of one item will reduce the demand for
a substitute
} Example: Tea & Coffee
} Complements
} Certain goods used together
} Example: Petrol & Car
} A decrease in the price of one shifts the demand of the
other rightward
29
Exceptions & Limitations of the Law of
Demand
} Inferior/Giffen Goods
} Decrease in price of bread DID NOT lead to increase in
demand
} Good having prestige Value
} Luxury Items like Diamond, price increase leads to increase in
demand due to perceived prestige value
} Price Expectation
} Expectation of a price fall will not lead to increased buying
} Fear of Shortage
} Leads to buying more than needed if at high price
} Change in Income
} With increase in income, consumers will buy more
} Change in fashion
} Basic Necessities of Life: Salt, medicines, staples etc
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THE LAW OF SUPPLY
31
SUPPLY Price / Pound $0.40 $060 $080
SCHEDULE
Quantity Demanded 10,000 20,000 30,000
$1.00
Price per
Apples
Tin $0.80
$0.60
$0.40
SUPPLY
CURVE
$0.20
10 20 30
Thousands of Pounds of Apples per day
32
Assumptions/Conditions/Determinants of the
Law of Supply
} No change in the state of technology or technique of
production
} No change in the price of factors of production
} No change in the number of firms in the market
} No change in the goals of the firm
} No changes in the seller’s expectation of future prices
} No change in the tax and subsidy policy of the products
} No change in the price of related goods
} No change in the natural factors: (disasters, natural
calamities)
33
Exceptions & Limitations of Law of Supply
} Auction sale/distress sale/liquidation
} Price Expectation of the seller
} Stock clearance sale
} Fear of being out of fashion
} Perishable Goods
} Agricultural Goods
} Rare objects
} Labour Market
34
MARKET EQUILIBRIUM
$1.00 DEMAND
SUPPLY
$0.80
10 20 30
36
Maximum (Highest) Price
} The disadvantage is that it will lead to lower supply.
There will also be a shortage, and demand will
exceed supply; this leads to waiting lists and the
emergence of black markets as people try to
overcome the shortage of the good and pay well
above market price.
} Maximum prices for train tickets. With monopoly
power, train companies could increase the peak
tickets, but governments may impose a maximum
price (or maximum price increase on firms) to keep
tickets affordable – even if it leads to over-crowding.
37
Minimum (Lowest) Price
} Minimum prices are used to give producers a higher
income. For example, they are used to increase the
income of farmers producing food.
} The equilibrium price is Pe. A minimum price leads to
increase in supply to Q2, but fall in demand to Q1.
} Example is minimum support
price for agri commodities
38
Minimum (Lowest) Price
The Disadvantages of Minimum Prices
} Higher prices for consumers.
} Higher tariffs necessary on imports.
} Minimum prices encourage oversupply and are
inefficient.
39
Importance of Time Element
} Marshall, who propounded the theory that price is determined by
both demand and supply, also gave a great importance to the
time element in the determination of price.
} Time elements is of great relevance in the theory of value, since
one of the two determinants of price, namely supply, and
depends on the time allowed to it for adjustment. Time period is
considered by him from Supply perspective.
} The reason why supply takes time to adjust itself to a change in
the demand conditions is that nature of technical conditions of
production is such as to prohibit instantaneous adjustment of
supply to changed demand conditions.
} A period of time is required for changes to be made in the size,
scale and organisation of firms as well as of the industry.
40
Importance of Time Element
Time can be divided into following three periods on the
basis of response of supply to:
} 1. Market Period:
} The market period is a very short period in which the
supply is fixed, that is, no adjustment can take place in
supply conditions.
} For instance, in case of perishable goods, like fish
market period may be a day and for a cotton cloth, it
may be a few weeks.
41
Importance of Time Element
2. Short Run:
} Short run is a period in which supply can be adjusted
to a limited extent. During the short period the firms
can expand output with given equipment by changing
the amounts of variable factors employed.
} Short periods is not long enough to allow the firm to
change the plant or given capital equipment.
42
Importance of Time Element
3. Long Run:
} The long run is a period long enough to permit the
firms to build new plants or abandon old ones.
} Further, in the long run, new firms can enter the
industry and old ones can leave it. Since in the long
run all factors are subject to variation, none is a fixed
factor.
43
Pricing of Products: Perfect Competition
Perfect Competition
} Many sellers sell identical/homogenous products to
many buyers. Examples: food grains, vegetable
markets
} It is a state of equilibrium price.
} Free entry & exit
} Perfect knowledge
} Absence of transport costs
} Perfect mobility of factors of production
44
Pricing of Products: Imperfect Competition
Monopoly
} Only 1 seller of a homogenous product which has no
substitute. Examples: Railways
} Price-discrimination & price fixing may be practised
} Strong barriers to entry
45
Pricing of Products: Imperfect Competition
Duopoly
} Only 2 sellers of a homogenous product. Examples:
Pepsi & Coke
} Price fixing can be practised
} Price discrimination is practised by charging different
prices for different consumers
} Strong barriers to entry
Oligopoly
} Few sellers selling similar products to many buyers.
Examples: Medicines, Mobile telephony, DTH
} Price rigidity is prevalent in these markets
} Cartelization may be practised
46
Pricing of Products: Imperfect Competition
Monopolistic Competition
} Large number of sellers selling differentiated products.
Examples: Automobiles, laptops
} Price varies for different product characteristics,
features etc
} Pricing may be fixed by sellers based on brand image,
promotion, after sales service etc to build brand loyalty
} Has parts of monopoly & perfect competition
} Products are near substitutes
47
Factor Pricing: Concept and Theories
48
Factor Pricing: Concept and Theories
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Factor Pricing: Concept and Theories
50
Factor Pricing: Concept and Theories
There are two aspects of each factor of production,
which are as follows:
i. Price Aspect:
Refers to the aspect in which an organization pays a
certain amount to avail the services of factors of
production. For example, wages, rents, and interests
constitute the price of factors of production.
ii. Income Aspect:
Refers to another aspect in which a certain amount is
received by a factor of production. For instance, rents
received by a landlord and wages received by labor
constitute the income generated from the factors of
production.
51
Theory of Rent
} Ricardo defined rent as, “that portion of the produce of
the earth which is paid to the landlord for the use of the
original and indestructible powers of the soil.”
} According to him, fertility, situation & limited total stock
which are original and permanent, give rise to rent.
} In his theory, rent is nothing but the producer's surplus
or differential gain, and it is found in land only.
} Since land was not homogeneous, a surplus was earned
on superior land over the marginal land due to
differences in fertility. This surplus was called economic
rent.
52
Theory of Rent
} For convenience, we call } Ricardian theory,
them A, B, C and D in the rent is a differential
order of their fertility. surplus and arises
from the fact that
land possesses
certain peculiarities
as a factor of
production. It is
limited in area and
its fertility varies.
Besides, its situation
is fixed.
53
Rent in Extensive Cultivation
} A time comes when all land of the best quality has been
taken up. But some demand still remains unsatisfied. We
have then to resort to ‘B’ quality land. It is inferior to ‘A’
and yields only 30 quintals of wheat per plot as compared
with 35 quintals of ‘A’ with the same expenditure of labor
and capital. Naturally plots in ‘A’ now acquire a greater
value as compared with ‘B’.
} A tenant will be prepared to pay up to 5 quintals of wheat
in order to get a plot in the ‘A’ zone, or take ‘B’ quality
land free of charge.
} This difference, paid to the owner (if the cultivator is a
tenant) or kept to himself (if he is the owner), is economic
rent. In the first case (i.e., when the cultivator is a tenant)
it is contractual rent; and in the latter (i.e., when the
cultivator is the owner) it is known as implicit rent. ‘B’
plots do not pay any rent.
54
Rent in Extensive Cultivation
} To go a step further, we see that after all land of ‘B’
quality has also been taken up, we begin cultivating ‘C’
plots. Now even ‘B’ quality land comes to have differential
surplus over ‘C’. Rent of ‘A’ increases still further.
} When the demand increases still more, we are pushed to
the use of the worst land, which is of ‘D’ quality yielding
25 quintals per plot. ‘D’ quality land is now no-rent land or
marginal land while ‘A’, ‘B’, ‘C all earn rent. This growing
demand shows itself in rising prices. They raise high
enough to cover the expenses of cultivation on the lowest
grade land, i.e., ‘D’ quality.
} Rent arises only in the short run
55
56
Rent in Intensive Cultivation
} Law of diminishing marginal utility
} Other important terms: Differential Advantages (eg:
railway facility); No-rent land (land which just about
covers the cost); Scarcity rent (after a time, due to
population growth, no-rent land also earns surplus)
57
Different types of capital
} The term "capital" can refer to a number of different
concepts in the business world.
} While most people think of financial capital, or the
money a company uses to fund operations, human
capital and social capital are both important
contributors to a company's overall financial health.
58
Financial Capital
This type of capital comes from two sources: debt and equity.
59
Human Capital
Social Capital
} Social capital is an even more intangible asset,
referring to the relationships people have to each
other, and the desire they have to do things for and
with others within their social networks.
60
Economic Definition of Capital
61
Interest : Meaning & Definition
} “Interest is the price of capital.”
62
Types of Interest- Net Interest & Gross
Interest
63
Functions of an Entrepreneur
64
Profit: Meaning and Theories of Profit
65
Gross Profit or Loss
} Gross profit is ascertained by deducting cost of goods sold (all direct
} Gross profit = Total sales - All direct expenses or cost of goods sold.
For example, suppose Mr. X purchased some goods for $10,000 and
the goods for $1,4000. Now, the cost of goods sold will be $10,300
66
Net Profit or Loss
67
Profit: Meaning in Economics
} Gross Profit= Revenues- Manufacturing Costs = TR-
TC
TR= Price of the product per unit X No. of Pieces (Quantity)
sold
TC=Total cost (fixed cost + variable cost)
68
Theories of Profit in Economics
1. Walker’s Theory of Profit as Rent of Ability
69
Theories of Profit in Economics
2. Clark’s Dynamic Theory
“Profits arise in a dynamic economy and not in static
economy.”
Dynamic means change in population growth,
method of production, consumer wants, new
inventions, technological advances etc.
This implies constant innovation. However, others
adopt the innovation and produce similar products
and thus the profits come down.
70
Theories of Profit in Economics
3. Hawley’s Risk Theory of Profit
} Risk in business may arise due to obsolescence of a
product, sudden fall in prices, non-availability of
certain materials, introduction of a better substitute
by a competitor and risks due to fire, war, etc.
Hawley’s considered risk taking as an inevitable
element of production and those who take risk are
more likely to earn larger profits. (More risk = More
profit)
71
Theories of Profit in Economics
4. Uncertainty Theory of Profit
This theory of profit is propounded by frank H. Knight who
treated profit as a residual return because of uncertainty,
and not because of risk bearing.
Knight made a distinction between risk and uncertainly by
dividing risk into two categories, calculable and non-
calculable risks. For example risk, due to fire theft
accidents etc. are calculable and such risks are
insurable. Incalculable risks are those the probability of
occurrence of which cannot be calculated.
“Profits are the reward of uncertainty bearing rather than
risk taking, which is insurable”
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THANK YOU