Unit I:

What Is Economics?

Economics is a social science that focuses on the production, distribution, and

consumption of goods and services. The study of economics is primarily
concerned with analyzing the choices that individuals, businesses, governments,
and nations make to allocate limited resources.

What is Microeconomics?

Microeconomics focuses on the choices made by individual consumers as well as

businesses concerning the fluctuating cost of goods and services in an economy.
Microeconomics covers several aspects, such as –
 Supply and demand for goods in different marketplaces.
 Consumer behaviour, as an individual or as a group.
 Demand for service and labour, including individual labour markets,
demand, and determinants like the wage of an employee.

What is Macroeconomics?

Macroeconomics studies the economic progress and steps taken by a nation. It also
includes the study of policies and other influencing factors that affect the economy
as a whole. Macroeconomics follows a top-down approach, and involves strategies
like –
 The overall economicgrowth of a country.
 Reasons that are likely to influence unemployment and inflation.
 Fiscal policies are likely to influence factors like interest rates.
 Effect of globalization and international trade.
 Reasons that affect varying economic growths among countries.
Sr.No Microeconomics Macroeconomics
1 Microeconics studies Individual Macroeconomics studies nations’s
economic units economy
2 Microeconomics primarily deals Macroeconomics is the study of
with individual income ,output ,price aggregates such as National output,
of goods etc income, as well as general price
levels
3 Microeconomics focuses on Macroeconomics focuses on
overcoming issues concerning the upholding issues like employment
allocation of resources and Price and National household income
Discrimination
4 Microeconomics accounts for Macroeconomics accounts for the
factors like demand and supply of aggregate demand and supply of a
particular commodity nation’s economy
5 Microeconomics offers a picture of Macroeconomics helps ensure
goods and services that are required optimum utilization of the resource
for an efficient economy. It also available to a country
showsthe goods and services that
might grow in demand in the future.
6 Microeconomics also focuses on The primary component of
issues arising due to price variation macroeconomics problems is
and income levels income

Deflation and its Types

Deflation, in economic terms, is the decrease in the general price level of goods
and services over time. It is often caused by a decline in consumer demand or an
increase in the supply of goods. When deflation occurs, it can lead to economic
downturns and financial instability, as businesses may struggle to sell their
products, and consumers may delay purchases in anticipation of further price
drops.

Types of Deflation
Understanding the different types of deflation is crucial in identifying the
underlying causes and potential remedies for deflationary pressures. There are two
main types of deflation: demand-pull deflation and cost-push deflation.

Demand-Pull Deflation

Demand-pull deflation occurs when aggregate demand falls below aggregate

supply, causing prices to drop. This type of deflation typically happens during
periods of economic downturn or recession when consumers reduce their
spending. As a result, businesses experience a decrease in demand for their goods
and services, leading them to lower prices in an attempt to stimulate sales.

One example of demand-pull deflation can be observed during times of high

unemployment rates. When people go through unemployment due to losing
their jobs or fear of losing them, they eventually become more cautious and tend
to tighten their budgets and spend less money on non-essential items. This
reduction in consumer spending puts downward pressure on prices as businesses
struggle to attract customers.

Cost-Push Deflation

Cost-push deflation occurs when production costs decrease, leading businesses to

lower their prices accordingly. This type of deflation often arises from factors
such as reduced wages, declining raw material costs, or improvements in
technology that increase productivity and efficiency.

For instance, if trade unions agree to wage concessions or if advancements in

automation allow companies to produce goods at a lower cost, businesses may
choose to pass these savings on to consumers through price reductions. In this
way, cost-push deflation is driven by changes in the supply side of the economy
rather than fluctuations in consumer demand.
Understanding the differences between demand-pull deflation and cost-push
deflation is essential for policymakers and economists as they formulate strategies
to address deflationary pressures. By identifying the root causes of deflation,
appropriate measures can be taken to mitigate its negative effects on the economy .

Impact Of Deflation

Deflation has significant consequences on various aspects of the economy. Let's explore some
of the key impacts that deflation can have:

1. Impact On The Economy

Deflations can have adverse effects on economies, leading to a range of challenges and
setbacks. Here are some of the consequences that arise from deflation:

2. Decreased Consumer Spending

When people expect prices to be lower in the future, they tend to delay their purchases. This
reduction in consumer spending can dampen economic activity and hinder growth.

3. Eroded Household Wealth

Falling prices often result in declining asset values, such as housing or investments. As a result,
households may experience a reduction in their wealth. This erosion of wealth can lead to
decreased confidence among consumers, further contributing to reduced spending.

4. Challenging Business Conditions

Businesses face declining revenues during periods of deflation. With lower demand and falling
prices, it becomes difficult for companies to sustain their operations or invest in expansion
projects. This can lead to job cuts, reduced investment, and overall economic stagnation.
Law of Demand
The law of demand is one of the most fundamental concepts in economics. It works with
the law of supply to explain how market economies allocate resources and determine the prices
of goods and services that we observe in everyday transactions.

The law of demand states that the quantity purchased varies inversely with price. In other
words, the higher the price, the lower the quantity demanded. This occurs because
of diminishing marginal utility.that is, consumers use the first units of an economic good they
purchase to serve their most urgent needs first, then they use each additional unit of the good to
serve successively lower-valued ends

Factors affecting demand

1. The shape and position of the demand curve can be affected by several factors. Rising
incomes tend to increase demand for normal economic goods, as people are willing to spend
more.

2. The availability of close substitute products that compete with a given economic good will
tend to reduce demand for that good because they can satisfy the same kinds of consumer wants
and needs.
Law of Supply

Supply is the total amount of a specific good or service that is available to consumers at a
certain price point. As the supply of a product fluctuates, so does the demand, which directly
affects the price of the product.

The law of supply law states that, all other factors being equal, as the price of a good or service
rises, the quantity that suppliers offer will rise in turn (and vice versa).

When demand exceeds the available supply, the price of a product typically will rise.

The law of demand tells us that if more people want to buy something, given a limited supply,
the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the
quantity that will be purchased by consumers

Price Elasticity of Demand.

Price elasticity of demand is a measurement of the change in the demand for a product in
relation to a change in its price. It is the Ratio of Percentage change in Quantity Demanded to
the percentage change in price

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷

Percentage Change in Price

Price Elasticity of It is known as Which means

Demand
Infinity Perfect Elastic Changes in Price result in demand
declining to zero
Greater than one Elastic Changes in Price yield a significant
change in demand
One Unitary Changes in Price yield equivalent
 Percentage change in demand
Less than one Inelastic Changes in Price yield an
Insignificant change in demand
0 Perfectly Inelastic Change in Price yield no change in
demand

As a rule of thumb, if the quantity of a product demanded or purchased changes more than the
price changes, then the product is considered to be elastic (for example, the price goes up by
5%, but the demand falls by 10%).

If the change in quantity purchased is the same as the price change (say, 10% ÷ 10% = 1), then
the product is said to have unit (or unitary) price elasticity.

Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10%
change in price), then the product is deemed inelastic.

To calculate the elasticity of demand, consider this example: Suppose that the price of apples
falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their
apple purchases by 20%. The elasticity of apples is thus: 0.20 ÷ 0.06 = 3.33. The demand for
apples is quite elastic.

Elasticity of Demand
Elasticity of demand is an important variation on the concept of demand. Demand can be
classified as elastic, inelastic or unitary.
An elastic demand is one in which the change in quantity demanded due to a change in price
is large. An inelastic demand is one in which the change in quantity demanded due to a change
in price is small.
The formula for computing elasticity of demand is:
(Q1 – Q2) / (Q1 + Q2)
(P1 – P2) / (P1 + P2)
If the formula creates an absolute value greater than 1, the demand is elastic. In other words,
quantity changes faster than price. If the value is less than 1, demand is inelastic. In other words,
quantity changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In
other words, quantity changes at the same rate as price.

Elastic Demand
Elasticity of demand is illustrated in Figure 1. Note that a change in price results in
a large change in quantity demanded. An example of products with an elastic demand is
consumer durables. These are items that are purchased infrequently, like a washing machine or
an automobile, and can be postponed if price rises. For example, automobile rebates have been
very successful in increasing automobile sales by reducing price

Inelastic Demand
Inelastic demand is shown in Figure 2. Note that a change in price results in only a small change
in quantity demanded. In other words, the quantity demanded is not very responsive to changes
in price. Examples of this are necessities like food and fuel. Consumers will not reduce their food
purchases if food prices rise, although there may be shifts in the types of food they purchase.
Also, consumers will not greatly change their driving behavior if gasoline prices rise .
Unitary Elasticity
If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in Figure
3. For example, a 10% quantity change divided by a 10% price change is one. This means
that a 1% change in quantity occurs for every 1% change in price

Recession
A recession is a significant, widespread, and prolonged downturn in economic activity. A
common rule of thumb is that two consecutive quarters of negative gross domestic
product (GDP) growth mean recession, although more complex formulas are also used.

What Causes Recessions

Numerous economic theories attempt to explain why and how an economy goes into recession.
These theories can be broadly categorized as economic, financial, psychological, or a
combination of these factors.

Some economists focus on economic changes, including structural shifts in industries, as most
important. For example, a sharp, sustained surge in oil prices can raise costs across the
economy, leading to recession

Some theories say financial factors cause recessions. These theories focus on credit
growth and the accumulation of financial risks during good economic times,
the contraction of credit and money supply when recession starts, or
both. Monetarism, which says recessions are caused by insufficient growth in money
supply, is a good example of this type of theory.
 Recession is a significant, widespread, and prolonged downturn in economic activity. A
common rule of thumb is that two consecutive quarters of negative gross domestic
product (GDP) growth mean recession, but many use more complex measures to decide if the
economy is in recession.

Unemployment is one key feature of recessions. As demand for goods and services falls,
companies need fewer workers and may lay off staff to cut costs. Laid off staff have to cut their
own spending, which in turn hurts demand, which can lead to more layoffs.

The Role of Information Technology in Today’s Economy

During a period of impeded development and continued instability, numerous

countries are searching for strategies that will invigorate development and make
new job opportunities. Information Technology (IT) is not just one of the quickest
developing industries — creating a large number of employments — but it is also
an imperative empowering influence of advancement and improvement.

The count of mobile subscription (6.8 billion) is drawing closer worldwide

populace figures, with 40% of people on the planet effectively on line. In this new
environment, the competitiveness of economies relies on upon their ability to
influence new innovations. According to the Datamation International, here are the
five economic effects of Information Technology.

1 . Direct employment creation — The Information Technology sector is, and is

expected to remain, one of the biggest employers. In the US only, Information
Technology and computers are expected to boom by 22% up to 2020, making
758,800 new employments. In 2016, the worldwide tech business sector will
develop by 8%, creating salaries, jobs and an augmenting scope of products and
services.

2. Contribution to GDP development — Findings from different nations affirms

the positive outcome of Information Technology on development. For instance, a
10% increase in broadband penetration is associated with a 1.4% increment in GDP
growth in emerging markets.

The Internet accounts for 3.4% of general GDP in a few economies. Majority of this
impact is driven by e-business — individuals publicizing and offering products on
the web.

3. Development of new administrations and businesses — Various public

services have become be available online and through cell telephones. The shift
towards cloud computing is one of the key trends for modernization. Information
Technology has empowered the development of a totally new area: the application
industry.

4. Workforce change — Information Technology has also added to the ascent of

entrepreneur, making it easy for self-starters to get to best practices, lawful and
administrative information, advertising and speculation assets.

5. Business advancement — Information Technology instruments used within

organizations streamline business forms and enhance productivity. The exceptional
explosion of connected gadgets throughout the world has made new ways for
organizations to serve their clients.