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Economics

Economics is the study of how men


and society choose, with or the
without the use of money, to employ
scarce productive resources, which
could have alternative uses, to
produce various commodities
overtime and distribute them for
consumption, now or in near future,
among different people and groups in
the society
- P.A.Samuelson
Terms Used in the Definition
Society
Men
Money
Productive Resources
Alternative Uses
Scope of Economics
Demand analysis and methods of forecasting
Cost analysis
Pricing theory and policies
Profit analysis with special reference to BEP
Competition
Some Macro Economic Issues

Factors Affecting an
Organization
External Factors: which are not in control.
Internal Factors: which are in control.
Different Branches of Economics
Micro Economics
Macro Economics
International Economics
Monetary Economics
Public Finance etc.
Economics Analysis
Partial and General equilibrium analysis
Static, Comparative and Dynamic analysis
Deductive and Inductive analysis
Positive and Normative analysis



Five Fundamental Concepts
Opportunity Cost
Time Perspective
Incremental Cost
Discounting Concept
Equi Marginalism
Consumption Theory
Want : feeling of mental pain
Need: requirement of body or mind
Satisfaction: process of consumption gives
satisfaction
Utility: capacity to yield satisfaction
Demand Analysis
Demand Theory, Objectives of Demand Analysis
Determinants of Demand
Elasticity of Demand and Demand Estimates
Importance in decision making
Demand Forecasting Methods
Marginal Utility
Assumptions
1. Identical Units
2. No Time Interval
3. Tastes and Preferences are constant
Marginal Utility Analysis
No. of Units
consumed
Total Utility Marginal Utility
01. 10 10
02. 17 7
03. 21 4
04. 23 2
05. 23 0
06. 21 -2
Relationship Between MU & TU
Phases MU TU
FIRST DECLINES INCREASES AT
DIMINISHING
RATE
SECOND ZERO MAXIMUM
THIRD NEGATIVE DECLINE
LAW OF EQUI-MARGINAL UTILITY
MUe= MUx/Px =
MUy/Py.
Px = Rs. 3
Py = Rs. 4

Unit
MU
of x
MU
of x
MU
of Y
MU
of Y

01 33 11 36 9
02 30 10 32 8
03 27 9 28 7
04 24 8 24 6
05 21 7 20 5
06 18 6 16 4
CONCEPT OF DEMAND
Desire to acquire it
Willingness to pay
Capability to pay
Price, Place and Time.
TYPES OF DEMAND
PRICE DEMAND, INCOME DEMAND, CROSS DEMAND
DIRECT & DERIVED DEMAND
DOMESTIC & INDUSTRIAL DEMAND
AUTONOMOUS AND INDUCED DEMAND
PERISHABLE &DURABLE GOODS DEMAND
NEW & REPLACEMENT DEMAND
FINAL & INTERMEDIATE DEMAND
INDIVIDUAL & MARKET DEMAND
TOTAL & SEGEMNTED DEMAND
SHORT & LONGRUN DEMAND
COMPANY & INDUSTRY DEMAND

SIGNIFICANCE OF DEMAND ANALYSIS
PRODUCTION PLANNING
INVENTORY PLANNING
COST BUDGETING
PURCHASE PLANNING
PRICING DECISIONS
Demand Analysis
Dx = f (Px, Py, Pz, B, W, A, E, T,U)
Dx = Demand for item X
Px, Py, Pz = Price of X Commodity, Price
of Substitute Goods, Price of
Complimentary goods respectively etc.
Determinants of Demand
Price of the commodity
Price of the substitute goods
Price of the Complimentary goods
Price Expectation of the users
Income of the consumer
Past Income
Advertisement Expenses
Tastes and Preferences
Law of Demand
When other things remain constant
(ceteris paribus), there is an inverse
relationship between price of the
commodity and quantity demanded by the
consumer
D = f (P)
Assumptions to the law of demand
Rationality
Utility is Cardinal
No change in consumers income
No change in consumers taste and preferences
No change prices of other related goods
No change in Population
Consumers total assets are constant
Demand Schedule
Price of the
Commodity
Quantity
Demanded
7 01
6 02
5 03
4 04
3 05
2 06
1 07
Price of the
commodity
Quantity demanded
P1
P2
Q1
Q2
Y
X
Demand curve
D
D
Reasons for Downward Sloping
Demand Curve
Diminishing Marginal utility
Substitution Effect
Income Effect
Change in Consumer Number
Price
Quantity Demanded
Quantity Demanded
D
D
Y
X
Y
X
D
D
D1
D1
Expansion and Contraction
in Demand
Increase and Decrease in
Demand
Exceptions to the Law of Demand
Uncertainty in Future
False Show
Giffen Goods
Necessities
Fear of the Scarcity of the Commodities
Change in other factor
Change in Demand Curves
Expansion and Contraction of
Demand
Increase and Decrease in
Demand
Factors affecting the Demand
Income of the Consumer
Taste of Consumers
Price of the Commodity
Distribution of Income
Geographical Approaches
Population
Price of the related goods
Concept of Supply
Law of supply
Expansion and contraction in supply
Increase and decrease in supply
Demand and supply equilibrium
Demand an supply interaction
Demand and supply equilibrium

Price of the
commodity
Total
Quantity
Supplied per
month
Total
Quantity
demanded
per month
Supply or
shortage
5 12000 2000 +10000
4 10000 4000 + 6000
3 7000 7000 0
2 4000 11000 -7000
1 1000 16000 -15000
Graphical Representation
P
R
I
C
E
P1
P
P2
S
D
QUANTITY
O Q1
Q
Q2
Equilibrium Point
Elasticity of Demand
It measures the rate of change in
consumers responsiveness with respect to
change in different factors affecting
demand.
Elasticity of Demand = proportionate
change in Quantity Demanded/
proportionate change in Price
Methods of Elasticity of Demand
Percentage Method
Point Elasticity
Outlay Method
Graphical Method
Types of Elasticity of Demand
Price Elasticity of Demand
Income Elasticity of Demand
Cross Elasticity of Demand
Advertising Elasticity of Demand
Expenditure Elasticity of Demand
Price Elasticity of Demand
Price Elasticity of Demand measures the
degree responsiveness of quantity
demanded of a commodity to a change in
the price.
It varies from Zero to infinite.
Degrees of Price Elasticity of
Demand
Perfectly Inelastic Demand
Relatively Inelastic Demand
Unitary Elastic Demand
Relatively Elastic Demand
Perfectly Elastic Demand

Price of the
Commodity
Quantity
Demanded
Y
X
Ep = Zero
Ep = Infinite
Ep > One
Ep = One
Ep < One
Degrees of Elasticity
Income Elasticity of Demand
It is the measure of responsiveness of
quantity demanded to a change in income
of the consumer.
It can be of two types: Positive and
Negative Income Elasticity of Demand.
Cross Elasticity of Demand
When the price of any one commodity
changes and due to this the quantity
demanded of another commodity changes,
the measurement of this is called cross
elasticity of demand
Point Elasticity of Demand
It measures a very minute change in price
and then measure the elasticity
Ed = Lower segment of Demand
Curve/Upper segment of Demand Curve
Price
Quantity
A
B
E
Ed = 0
Ed <1
Ed = 1
Ed > 1
Ed = Infinite
Point Elasticity of
Demanded
Arc Elasticity
It measures the responsiveness of
demand between two points on the
demand curve such as X and Y. In other
words it is a measure of average elasticity
i.e. the elasticity at the midpoint of the
chord that connects the two points on the
demand curve defined by the initial and
new price levels.
Factors affecting Elasticity of
Demand
Nature of Commodity
Money spent on a commodity
Availability of Substitutes
Multiple uses of a commodity
Possibility of Postponement of Consumption
Price level and Extent of Price change
Time Element
Demand Estimates
Market studies and Experimentation
Survey of Intentions
Statistical Analysis of Historical Data
Estimating the quantitative Effects on the
Demand Curve of changes in Determining
Forces:1. Changes over Time as Source of
Information 2. Different Groups of
Consumers as Sources of Information
Demand Estimation for New
Products
Evolutionary Approach
Substitute Approach
Growth curve Approach
Sales experience Approach
Opinion sampling Approach
Vicarious Approach
Demand Forecasting
Prediction: refers to the more than one
variable analyzed altogether.
Projection: refers to the single variable at
a time.
Estimation: refers to expected sales level,
given the present state of demand
determinants
Forecasting: refers to the future trend of
variable.
Passive Forecast: when the firm does not
change the course of its action.
Active Forecast: when the firm changes
the course of its action.
Purpose of Forecasting
To avoid over-stocking
To save the wastage in material
To save man-hours, machine time & Capacity
Long term financial planning
expansion of existing units
Man power requirements

Steps involved in Forecasting
First Identification of Objective
Second determining the nature of goods
under consideration
Third - Selecting a proper method of
forecasting
Fourth- Interpretation of results
Determining scope of a forecasting exercise
Period of Forecasting
Short run forecasting
Medium term forecasting
Long run forecasting
Levels of forecast
Macro economic forecast
Industry demand forecast
firm demand forecasting
product line forecasting
General purpose or specific purpose forecast

Methods of Forecasting
Opinion Polling Methods
Consumers Survey
Method
Complete Enumeration
Survey
Sample Survey and Test
Marketing
End Use
Sales Force Opinion
Method
Expert Opinion Method
Statistical Methods
Trend Projection Method
Barometric Techniques
Regression Method
Simultaneous Equation
Method
Trend Projection Method
Fitting Trend Line by
Observation
Least Squares Linear
Regression
Straight Line
Parabolic
Logarithmic or
Exponential
Time Series Analysis
Moving Average and
Annual Difference
Exponential Smoothing
ARIMA Method
Barometric Techniques
Leading, Lagging and
Coincident Indicators
Diffusion Indices
Meaning of Production
Prof. J. R. Hicks, Production may be
defined as any activity, whether physical
or mental, which is directed to the
satisfaction of other peoples wants
through exchange.
Production Process
Inputs
Transformation
Output
Factors of Production
Land
Labor
Capital
Entrepreneurship

Characteristics of Factors of
Production
Complementarity
Substutability
Specificity
Mobility


Laws of Production
Laws of Variable Proportions
Laws of Returns to Scale

Law of Variable Proportions
Number
of Labor
Total
Product
Marginal
Product
Average Product
0 0 - -
1 40 40 40.0
2 90 50 45.0
3 150 60 50.0
4 210 60 52.5
5 260 50 52.0
6 300 40 50.0
7 330 30 47.1
8 350 20 43.8
9 360 10 40.0
10 360 0 36.0
Assumptions of the Law
Only one factor is increased while others
are kept constant.
The various units of the variable factor are
homogeneous.
Conditions of production like production
method,technique,climatic conditions are
constant.
Laws of Variables Proportions
Law of increasing returns
Law of decreasing returns
Law of constant returns
PRODUCTION FUNCTION



C
A
P
I
T
A
L
6 122 173 212 245 274 300
5 112 158 194 224 250 274
4 100 141 173 200 224 245
3 87 122 150 173 194 212
2 71 100 122 141 158 173
1 50 71 87 100 112 122
0 1 2 3 4 5 6
LABOUR
Cobb-Douglas Production
Function
Diminishing Returns to a factor
Constant returns to scale
Economies of large scale
production
Internal economies of scale
Labor economies
Purchase economies
Marketing economies
Financial economies
Technological economies
Managerial economies
Continue
External economies of scale
Economies of concentration
Economies of Information
Economies of research and development
Economies of Negotiation
Cost of Production
Average Total Cost
Average Fixed Cost
Average Variable Cost
Fixed Cost
Variable Cost
Marginal Cost
Long run average cost curve
Various Cost Relationships
(1)
Quantity
Of
Output
(2)

FC

(3)

VC
(4)

TC
(5)

AFC
(6)

AVC
(7)

AC
(8)

MC
0 50 - 50 - - - -
1 50 10 60 50.0 10.0 60.0 10
2 50 19 69 25.0 9.5 34.5 9
3 50 27 77 16.7 9.0 25.7 8
4 50 34 84 12.5 8.5 21.0 7
5 50 42 92 10.0 8.4 18.4 8
6 50 52 102 8.3 8.7 17.0 10
7 50 64 114 7.1 9.1 16.2 12
8 50 78 128 6.3 9.8 16.1 14
9 50 96 146 5.6 10.7 16.3 18
10 50 120 170 5.0 12.0 17.0 24
Break Even Analysis
It is that minimum level of output or sales
which is necessary to avoid losses.
Assumptions
total cost of the firm can be clearly divided into
fixed costs and variable costs.
the fixed cost remain fixed.
the variable cost changes at a constant rate.
constant inputs costs
the firm is a single manufacturing firm.

Different Types of Market
Perfect Competition Market
Monopolistic Competition
Oligopoly
Monopoly
Perfect Competition market
characteristics
Large number of buyers and sellers
Homogeneity of product
Free entry and exit in the market
Perfect knowledge of the market
No discrimination
Firms Equilibrium Under Perfect Competition
Firms Equilibrium by Total Cost and Total
Revenue Method







Quantity
Sold
Price of
Product
Total
Revenue
1 10 10
2 10 20
3 10 30
4 10 40
5 10 50
6 10 60
7 10 70
8 10 80
9 10 90
10 10 100
Firms Equilibrium by Marginal Revenue and
Marginal Cost Method under Perfect Competition
Output
(Units)
Price (Rs.) TR (Rs) MR (Rs) AR (Rs)
1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
6 10 60 10 10
7 10 70 10 10
8 10 80 10 10
9 10 90 10 10
10 10 100 10 10
Monopoly Market
When there is only one seller in the
market
The distinction between firm and market
disappears
Railways is an example of a monopoly
market in India
Total Revenue and Total Cost Method
Price (Rs.) Quantity
Demanded
(Units)
TR (Rs.) AR (Rs.) MR (Rs)
10 1 10 10 10
9 2 18 9 8
8 3 24 8 6
7 4 28 7 4
6 5 30 6 2
5 6 30 5 0
4 7 28 4 -2
3 8 24 3 -4
Monopoly Firms By Marginal Method
MC, AC, MR and AR curves are used
AR curve will lie on the demand curve of
the firm
The conditions for firms equilibrium:
MR = MC
MC must cut MR from below of it.
Price Discrimination in Monopoly
It is a situation where a seller charges
different prices from different customers
for the same product.
It is possible
Monopoly Market
elasticity of demand is different in the
two markets
the commodity or service being sold is
not transferable between persons and
markets.
Monopolistic Market
Monopolistic competition is that market in
which firms compete with each other but it is
not like a perfectly competitive market.
Characteristics:
the no. of firms is large, but it is not as large
as in perfect competition.
Goods are similar but not homogeneous.
Entry and exit is easy and there are no
significant barriers.
Price is not the only basis of competition
between different sellers.
Pricing Policy in Practice
Mark-up Pricing
Marginal Cost Pricing
Going Rate Pricing
Penetration Pricing/ Predatory Pricing
Skimming Pricing
Limit Pricing: it is adopted to prevent the entry of
other firms by existing producers in the market.
Discriminatory Pricing
Differential Pricing
Product line Pricing
Psychological Pricing
Two Part Pricing
Oligopoly Market
It is a market form in which the number of
sellers is quite few and they are affected by
the behavior of each other.
Characteristics:
Difficulties in oligopoly forms, Differentiated
and Undifferentiated.
Uncertainty in behavior
Mutual interdependence amongst different
firms.(Price Rigidity and Kinked Demand
Curve)
Non- Price Competition is more prominent
than price competition
Definition
Macro Economics, is a study of aggregates
or the study of a system as a whole in
which different micro units are operating.
Accordingly, when we study the behavior
of a countrys economy, which consists of
different consumers, producers(firms),
markets and industries, we are in the
domain of Macro Economics.
Characteristics
Study of aggregates
Dynamic in nature
Individual an collective problems are different.
e.g. problem of unemployment for an individual
and general unemployment.
Paradox of thrift

Functioning of a Macro Economic System
There is a very high degree of
interdependence between the two
segments of the economy and it is in the
interest of everybody to keep the circular
flow moving without any obstruction.
The flow of income is circular. It means
that money is in continuous motion and
any payment made by any sector comes
back to it after sometimes.
NATIONAL INCOME
It is a flow concept.
It is always in monetary terms.
It is total value of goods and services
produced annually in a country.
It includes payments made to all
resources in the form of wages,interest,
rent and profits.
DIFFERENT CONCEPTS OF NATIONAL INCOME
Gross National Product: It is the total
measure of the flow of goods and services
at market value resulting from current
production during a year in a country,
including net income from abroad.
GNP at FC= GNP at MP Ind.taxes+ Sub.
NNP = GNP Depreciation




Continue
Private Income= NI+ Transfer Payments+Int.
on Public Debt Social Security Profits &
Surpluses of Public Undertakings.
Personal Income= Pri. I Undistributed
Corporate Profits Profits Taxes
Disposable Income= Personal Income Direct
Taxes
Discretionary Income= DI- compulsory savings
and loan repayment.
Per Capita Income
National Income at Constant
Prices
National Income at Constant Prices = National
Income a Current prices* 100/ Index Number

Year NY at
Current
Prices
(Rs.000
Cr. )
Price Index
Number(ba
se
2000=100)
NY at
Constant
Prices(Rs.
000 Cr. )
2000 500 100 500.00
2001 525 105 500.00
2002 570 112 508.93
2003 610 120 508.33
2004 680 130 523.08
Methods to Measure National
Income
Production Method
Income Method
Expenditure Method
Consumption Function
Consumption is a function of Income.
C= a+bY, C= consumption=minimum
level of consumption,b=MPC,Y=incomes
MPC
MPS

Investment function
I=d + eY
Where, I = Total Investment Amount,
d= autonomous investment,
e= the marginal rate of increase of
investment on account of increase in
income
Y = Level of income
Multiplier
It gives the ratio between increase in
national income and increase in
investment.
Multiplier=1/1-MPC=1/MPS
Inflation
When too much money chasing too few
goods.
Type of Inflation:
Creeping Inflation
Walking Inflation
Running Inflation
Hyper Inflation
Measurement of changes in Price Level
Three methods to calculate index based:
Wholesale Price Index
Consumer Price Index
Producers Price Index


Composition of Products in WPI in India
Group of Articles No. of Commodities Weightage in %
Primary Articles (Food,
Non- food, )
98 22.0
Energy Articles 19 14.2
Manufactured Products 318 63.8