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Economic Analysis

1. Types of Economic Analysis 2. Tools and Techniques of Economics Analysis

Micro Vs Macro Partial Vs General Equilibrium

Economic Analysis

Positive Vs Normative

Micro Vs Macro

No 1 Micro Economics Macro Economics It is the study of particular It is the study of the entire economy parts(firms, households & industries) of the economy Partial picture of the economy Complete picture of the economy It uses slicing method of analysis It is known as price theory Deals with analysis partial It uses lumping method It is known as income theory equilibrium It deals with general equilibrium analysis

2 3 4 5

7 8

Deals with micro variables such as It deals with macro variables like national income, output and employment of income, output, employment etc the firm and industry. Limited scope Wider scope

Individualistic in its methodology Aggregative in its methodology

C This is just C Pronounced as Sea This is C ++ Pronounced as Sea Plus Plus C ++

This is single character namely C This a little hardware oriented This is teach by Gobind sir

Is in 2nd semester

There are three character namely C,+,+ This not a little hardware oriented This is teach by Rosy Maam

Micro Economics

Product Pricing

Theory of Demand

Wage

Rent

Interest

Profits

Theory of Income and Employment

Theory of Consumption

Theory of Investment

Partial Equilibrium Equilibrium position of a particular economic entity a consumer, a producer, a market etc. Based on Ceteris Paribus assumption.

Eg 1. Equilibrium price of a particular commodity in a competitive market. Eg2.Equilibrium output of a monopoly firm.

General Equilibrium

Equilibrium analysis of the economy as a whole. Eg. Equilibrium prices and outputs of all the industries at the same time. Interdependence among all economic units. When all eco. entities attain their partial equilibria simultaneously general eqm. happens. Conditions 1. Each individual economic entity is attaining its maximization goal. 2. Each market as well as factor is in equilibrium having demand = supply.

Positive Vs Normative

No 1 Positive Economics Old English Classical School Normative Economics Historical School of Germany

2

3 4 5 6 7 8

It is a study of the cause and It is a study of rightness or wrongness effect of a problem of things It deals with realistic situations It deals with idealistic situations It can be verified with actual It cannot be verified with actual data data It is a descriptive science It is a prescriptive science It is based on facts and figures It is based in ethics

It refuses to pass value It passes judgments judgments It identifies economic problems It prescribes solutions to the problems

Static Analysis

Functional relationship established between variables whose values relate to the same point of time.

Comparative Statics Compares one equilibrium position with another when the data have changed and the system has finally reached another equilibrium position.

Dynamic Analysis

Analysis of relationship between variables whose values belong to different points of time. Change in variables over time, their actions and interactions upon each other through time, expectations and anticipations held by eco. units about future. Based on realistic assumptions

Variables

Definition: Variable is the quantity or numerical characteristic of data. It varies over time. All quantifiable economic entities are treated as variables in eco. analysis. E.g. Price,demand,supply,income interest rate ,profit, population,gdp growth

Year 2012 2011 2010 Crude Oil Price 113.95 107.46 77.45

2009

2008 2007 2006 2005

61.06

94.45 69.08 61.08 50.64

2004

2003 2002 2001 2000 1999

36.05

28.1 24.36 23.12 27.6 17.48 Source:http://www.opec.org

Month Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12

Source:http://www.opec.org

Crude Oil Price 109.04 111.62 106.32 107.61 106.29 110.08 107.34 111.76 117.48 122.97 118.18 108.07 96.37

Types of Variables

Discrete

& Continuous

Endogenous

Variables

& Exogenous

Dependent

& Independent

Discrete Vs Continuous

A Discrete variable is one which can have values in integral numbers only. It cannot be measured but, counted only. E.g. No. of children in a family 1,2,3 etc Population data in general A Continuous variable is one which can assume any value(even fractions). Values which are measurable E.g. Income,income,consumption,savings

Endogenous Variable: The value of these variables is determined within the framework of the analysis model. E.g. For a firm- raw materials,labour,capital employed, finances are endogenous variables.

Exogenous Variable:The value of these variables is determined outside the framework of the analysis model. E.g. For a firm taxation policy, credit policy, industrial policy, inflation etc are exogenous variables

Dependent variable is one whose value depends on the value of other variables. E.g. Domestic oil price is a dependent variable and international oil price is an independent variable.

Independent variable is one whose value changes on its own or is assumed to change due to exogenous factors. Demand for computer is a dependent variable and price of computer is an independent variable.

Functions

Functions

Interrelated and interdependent economic variables. When a relation is established between two or more variables, it is said that they are functionally related. Function refers to numerical relationship between any two or more variables having cause and effect relationship. E.g.1 D= f(P) demand is a function of price. E.g.2 C= f(Y) consumption is a function of income.

Declining Function E.g. Qd=20-3p P

1 2 3 4 5

P 1 2 3 4 5 Qs 3+2(1) = 5 3+2(2) = 7 3+2(3) = 9 3+2(4) = 11 3+2(5) = 13

Qd

20-(3X1) = 17 20-(3X2) = 14 20-(3X3) = 11 20-(3X4) = 8 20-(3X5) = 5

Bi-variable Functions A function involving one independent variable and one dependent variable. D=f(P) Demand is a function of Price(P). For each value of P there will be a unique value of D. Multivariable Functions One dependent variable and more than one independent variables. D=f(Px,Y,Ps,Pc,A,T,E,U) Px price of the commodity, Y Income Ps Price of substitutes Pc price of complementary goods A Advertising Expenditure T Tastes and preferences E Price expectations U Any Undefined Factor

Uses of Functions

It determines the relationship between the dependent and independent variables for effective use of economic functions properly in business decisions. A specific function is used for determining the nature and measuring the relationship between the variables. It quantifies the relationship between the variables with the help of a statistical technique called regression technique.

Graphical Analysis

Two straight lines intersecting at angle of 90 degrees. These lines are known as co-ordinates axes. The intersection point is known as the Origin

Slope

It is defined as the ratio between change in the depended variable and change in the independent variable. It shows how strongly or weakly two variables are related. Steeper the curve weaker the relationship Flatter the curve - stronger the relationship Measurement Slope = Y change in the vertical axis X change in the horizontal axis

Measuring Slope

For a linear function or curve slope remains the same throughout.

For a Non-linear function slope is not constant

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