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Qazi A.

Subhan
M. Sc (Eco), IIU, Pak M. Phil (Eco), QAU, Pak LLM (IPR), Italy

Structure of the course (Up to Mid Term)


Weeks 5 Theory of Cost Weeks 6 Market Structure Week 7 Perfect Competition

Weeks 4 Elasticity of Supply and Demand

Weeks 3 Concept of Demand, Supply and Market Equilibrium

Micro Economics

Week 8 Introduction to Monopoly, comparative Analysis of PC & Monopoly

Week 9 Weeks 2 Consumer Equilibrium Weeks 1 Introduction to economics

Mid Exam

Qazi Subhan

Bahria University

Department of Management Sciences

Fall 2011

Structure of the course (Up to Final Exam)


Weeks 14 Concept of Multiplier Weeks 15 Demand Management Policies Week 16 Monetary and Fiscal Policy

Weeks 13 Investment Theory Week 17 Inflation and Unemployment and their measurement
Weeks 12 Consumption and Saving Functions

Macro Economics
Week18

Weeks 11 National Income Determination

Final Exam
Weeks 10 Introduction to Macro economics Bahria University Department of Management Sciences Fall 2011
3

Qazi Subhan

Introduction to Micro Economics


Theory of Consumer Behavior Definitions Utility and its Measurement Concept of Demand and Supply Elasticity of Demand and Supply Relationship between Elasticity of DD & Total Revenue Theory of Cost Definition Types of Cost Application of types of Cost in Economic Decisions Theory of Market Structure Types of Market Structure and their interrelationships

An Overview of Macroeconomics
1. 2. 3. 4.

Introduction to Macroeconomics National Income Determination Keynesian Consumption Function Saving Investment Function

5.
6. 7.

The Concept of Multiplier


Inflation and Unemployment Demand Management Policies

8.

Measurement of Inflation with price Indices.

Definition of Economics
Definitions of Economics
Adam Smith Alferd Marshall Prof. Robbins

General Definition

Economics is the study of knowledge which guides a consumer about the allocation of scarce resources in the presence of unlimited wants.

According to Adam Smith


Economics is a Science of Wealth
Four dimensions of Definition;
Production of Wealth Consumption of Wealth Exchange of Wealth Distribution of Wealth

According to Alferd Marshall


A well known Neo-Classical Economist has defined

Economics as Behavioral Science Economics is the study of mankind in an ordinary business of life. Alfred Marshall has examined the individual behavior, ordinary business of life and use of the material requite of well beings.

According to Prof. Robbins


Economics

is a social science which studies the human behavior as a relationship between multiple ends and scarce resources which have an alternative uses.

CLASSIFICATION OF ECONOMICS

Economics

Theoretical Economics

Applied Economics

Normative Economics

Positive Economics

Micro Eco

Macro Eco

Mathematical Economics

Theoretical Economics
It consists of Economic theories like consumer theory,

firm theory, Theory of distribution etc. It is broadly categorized into two main branches: Positive and Normative. Positive Economics addresses the issues related to real facts and figures of the state like current literacy rate, current Inflation rate, current Exports or current balance of payments. Normative Economics prescribes that a certain action should be taken to rectify any economic and social problem. For example, the literacy rate of Pakistan should be up to 90%. if the objective is to do future planning then it is called Normative Economics Positive Economics is further decomposed in to three parts: Microeconomics, Macroeconomics and Mathematical Economics.

Micro economics examines the economic behavior

of individual such as businesses, households, and individuals, with a view to understand decision making in the face of scarcity and the allocation consequences of these decisions. Macroeconomics: which considers the economy as a whole. All those issues which have significant impact on the economy are discussed. For Instance, Inflation, Unemployment, Literacy rate, Health Situation, transportation, communication etc. Mathematical Economics : It is mathematical interpretation of Economic theories and models Applied Economics: It is used to formulate policies for betterment of nation by utilizing the current information with the help of statistical tools

Objectives in Micro Eco


Consumer Producer

Utility Maximization Production Maximization

Firm Owner

Profit Maximization

Theory of Consumer Behavior


CONCEPT OF UTILITY Definition and Types of Utility Measurement of Utility Classical Approach/Cardinal Approach/Marshallian Modern Approach/Ordinal Approach/ Hicksian Laws of Utility ( Under Classical Approach) Law of Diminishing Marginal Utility Law of Equi- Marginal Utility

Concept of Utility
Utility means mental level of satisfaction which a

consumer attains after the consumption of goods and services Types of Utility
Initial Utility Marginal Utility Total Utility Positive Utility Zero Utility

Negative Utility

Measurement of Utility
According to classical approach Utility can be

measured through UTILS ( One Unit of Utility) or in Numbers or in Digits. To Prove it, Professor Marshall has introduced two Laws of Utility:
Law of Diminishing Marginal Utility Law of Equi- Marginal Utility

Law of Diminishing Marginal Utility


DEFINITION

This law states that when a consumer increases the consumption of commodity continuously, the marginal utility decrease with each additional unit.
ASSUMPTIONS

Suitable unit of consumption


Continuous use of product

Nature of product (only one good is consumed)


Income remains constant

Table and Graph


Commodity (X) 1 2 3 Total Utility 30 55 75 Marginal Utility 30 25 20

4
5 6 7 8

89
100 104 104 98

14
11 4 0 -6

Law of Diminishing Marginal Utility


120 100 80
TU, MU

60 40 20 0 -20 0 2 4 6 8 10

Total Utility Marginal Utility

Units of X Commodity

Limitations/ Exceptions
Knowledge

Music
Hobbies Money

Law of Equi-marginal Utility


Definition Law of Equi-Marginal Utility describes that if there

were two goods for consumption then a consumer would be in equilibrium when marginal utilities of two goods are equal. It is also called utility maximizing rule for the consumer.

Assumptions
Income of the consumer is given Two goods for Analysis Utility is cardinal ( Measured in numbers) Items are divisible Consumer is rational (Utility Maximizer)

Explanation of Law of Equi- Marginal Utility


To prove this law, we take an example. For

Rupees 1 2 3 4 5

MUA 25 20 15 10 5

MUB 20 15 10 5 0

instance, a person has five rupees and he has to purchase two goods (A, B) A Consumer would be in equilibrium at that point where MU of A good is equal to MU of B

Modern Approach to Utility Measurement/ Indifference Curve Approach


Definition of Indifference Curve According to J. R. Hicks, An Indifference curve is a locus (Aggregation) of all those combination of Goods (X and Y) which are giving same level of satisfaction to consumer and the consumer is indifferent among those bundles of X and Y

Assumptions
Rationality (Consumer is Rational or Utility

Maximizer) Diminishing Marginal Rate of Substitution (DMRS) Utility is Ordinal U = f (X1+X2+ X3+X4--------------XN) =K

Diminishing Marginal Rate of Substitution


It is one of the significant properties of

indifference curve. Rate of substitution means the rate at which one commodity is substituted with another commodity. To keep the level of satisfaction at constant level (or to fulfill the last assumption of Indifference Curve), if the consumer wants to increase the use of one good (A), then the consumption of other good (B) should be decreased.

Properties of Indifference Curve


Convex to the Origin Downward Sloping DMRS (Diminishing Marginal rate of Substitution) Higher is better ( In terms of Utility) Do not Intersect each other

BUDGET LINE
Budget line consists of all those bundles of goods,

which are affordable at given price and income.

Budget Line

Budget Set and Constraint for Two x Commodities


2

m /p2

Budget constraint is p1x1 + p2x2 = m.

m /p1

x1

Budget Set and Constraint for Two x Commodities


2

m /p2

Budget constraint is p1x1 + p2x2 = m.


Just affordable

m /p1

x1

Budget Set and Constraint for Two x Commodities


2

m /p2

Budget constraint is p1x1 + p2x2 = m.


Not affordable Just affordable

m /p1

x1

Budget Set and Constraint for Two x Commodities


2

m /p2

Budget constraint is p1x1 + p2x2 = m.


Not affordable Just affordable Affordable

m /p1

x1

Budget Set and Constraint for Two x Commodities


2

m /p2

Budget constraint is p1x1 + p2x2 = m. the collection of all affordable bundles.


Budget Set m /p1 x1

Budget Set and Constraint for Two x Commodities


2

m /p2

p1x1 + p2x2 = m is x2 = -(p1/p2)x1 + m/p2 so slope is -p1/p2.


Budget Set m /p1 x1

Changes in Budget Line


Changes in Prices
If Price of X good Increases If Price of Y good Increases If Price of X good decreases

If Price of Y good decreases

Changes in Income
Income of consumer increases Income of consumer decreases

CONSUMER EQUILIBRIUM
Two Conditions
At equilibrium point Indifference curve should be

Convex to the Origin Slope of Indifference curve should be equal to slope of budget line

Consumer Equilibrium
x2

x2
x2

E1

E0

E2

x 1

x1

x1

Changes in Consumer Equilibrium


Change in Price of X Good Either Price of the good increases Or Price of the good decreases Change in Price of Y Good Either Price of the good increases Or Price of the good decreases

Change in Income of a consumer Change in Nature of Goods

Nature of Goods
Necessities Normal Good

Consumer Goods
Inferior good ( Related with income) Giffen Good (Related with price)

Substitute Goods
Complement goods

Derivation of Demand Curve from Indifference Curve


The demand curve can be derived from indifference

curve. As price decreases, the purchasing power of a consumer increases, he would purchase more of that good. The same relationship can be depicted in demand curve.
Demand curve shows the relationship between price

and quantity demand.

Own-Price Changes
Fixed p2 and y.

p1
p1

Ordinary demand curve for commodity 1

p1
p1 x1*(p1) x1*(p1)

x 1*

x1*(p1) x1*(p1) x1*(p1)

x1*(p1)