Economics Notes

PRINCIPLES OF MICROECONOMICS [Based on Book]

Principle 1
Opportunity cost means that when you have two good o ers and you have to let go of one of
them. (Have to make a compromise)

E ciency means property of society getting the most it can from its scarce resources.
Equality means the property of distributing economic prosperity uniformly among the members of
society.

Principle 2: Cost of something is what you give up to get it

Principle 3: Rational people think at the margin

Marginal Change means a small incremental adjustment to an existing plan of action. (Margin
means “edge” so the marginal changes are edges to regular things).
People usually think about marginal bene ts along with marginal costs.

Marginal Bene ts are the little bene ts that people get by possessing a certain item which they
might not need, however, their possession of that item gives them a sense of status/ satisfaction.
(The Diamond-Water paradox)

Principle 4: People respond to incentives

Incentives are like rewards or punishments that are given as a result of any kind of an action (say
wearing a helmet/ using electric cars). (They work both in a good & a bad manner)

DO STUDY CASE STUDY FROM THE BOOK [Ques. Can be asked]

Principle 5: Trade can make everyone better o

Principle 6: Markets are usually a good way to organize economic activity

Central Planning : when a communist party plans the distribution of resources/

Market Economy: Households decide what to buy with their incomes and they decide what rms
run the most. Their interests guide their decisions.
In a market economy, society’s well being is overlooked. They are interested only in self well being.
Tho, they still are successful, also for promoting overall economy.

In his 1776 book An inquiry into the nature and causes of the wealth of nations, economist Adam
smith made the most famous observation all of economics: Households and rms interacting in the
markets act as if they are guided by an invisible hand that leads to the overall improvement of the
market.

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 Principle 7: Govt. can sometimes improve market outcomes.

Market failure happens because of externalities or market power.

Market Power: a person who holds power to in uence market prices. (Like Ronaldo put aside
coke can)

Principle 8: Company’s std of living depends on its ability to produce goods and
services.

Principle 9: Prices rise when the government prints too much money.
In ation is caused when governments creates large amount of money. People start spending more.
Everything will spike up.

Principle 10: Society faces a short run trade o between in ation and unemployment.

Principle 8,9 & 10 are important. Remember them.

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Demand
It is an economic concept that relates to a consumer’s desire to purchase goods and services and
willingness to pay a speci c price for them.

Law of Demand: An increase in the price of a good or service tends to decrease the quantity
demanded. Likewise a decrease in the price of a good or service will increase the quantity
demanded.

These two are di erent: Market Demand and Aggregate demand.

Market demand: the demand for a speci c good demanded by all consumers in a market.
Aggregate demand: this is the total demand for all the goods and service in an economy.

Demand Curve
• It is a graphical representation of the relationship between the price of a good or service and the
quantity demanded for a given period of time.
• It is the relationship between price and quantity demanded.
• As the price increases, the demand decreases and vice versa while all else being equal.

[PTO]

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 MID SEM QUESTION
Shifts in Demand Curve
Whenever there is an increase in demand, the
demand curve shifts towards the right side. And if
there is a decrease in demand curve, the curve
would shift towards the right.
GRAPH IMPORTANT TO DRAW IN EXAM!!!!

Determinants of Demands
Complimentary Goods: Goods who in uence each other - increase in price of one product will
cause a decrease in the quantity demanded of a complementary product. Example: Rise in the price
of beer will reduce the demand for butter. This is because they are complementary.
Substitute Goods: Goods which can replace each other - increase in the price of one product will
cause an increase in the demand for a substitute product. Example: Rise in the price of tea will
increase the demand for co ee and decrease the demand for tea.
Normal Goods: These are the goods whose demand is directly related to consumers income.
Which work with the natural forces of demand and supply.
Inferior Goods: The demand decreases when the income increases. Like especially cheaper goods.
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 The demand is determined by:
1. Consumers’ incomes.
2. Price of related goods
3. Consumers’ tastes and preferences
4. Advertisement expenditure (selling cost)
5. Demonstration e ect
6. Population of the country
7. Distribution of national income.
8. Attitudes or feelings about products
9. Prices related to goods
10. Customers’ expectations
11. Number of consumers in the market

These are the determinants of demand.

[ADD THE NOTES WHICH YOU MADE IN THE NOTEBOOK]

Flatter the curve, bigger the elasticity and steeper the curve, smaller the elasticity

Perfectly elastic demand : change in price = change in demand (straight line graph)
Perfectly INelastic demand: for any change in price, there is no change in demand
INelastic demand: perfecntage change in demand is less than the the change in price
Unit Elastic Demand: (Perfectly elastic demand)
Elastic Demand: change in demand is greater than the change in price
Perfectly Elastic Demand: slightest change in price produces very high change in demand

Price Elasticity of Supply

Price elasticity of supply = (% change in Qs / % Change in P)

Perfectly inelastic : perishable goods : goods with low shelf life, like milk or something agar price
kam ho gayi toh mai dudh bechna kam nahi kar sakta otherwise the milk will go bad
Inelastic : something like onion where you cant instantly uincrease the supply to the same amount
of change that happened in the price

Consumer Surplus: It is the di erence between the maximum price that a consumer is willing to
pay and the price that he actually ends up paying as decided by the market (the equilibrium price).
Ex: If im in dire need of a marker i might also just pay 20 rupees more.

Producer Surplus: The di erence between the market price (equilibrium price) and the minimum
price that the producer is willing to accept is the producer’s surplus.
Ex: If ink of some marker is gonna go o then i might sell the marker for the same price it took me
to make.

Thoda aur complicated but not so hard to understand:

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 producer surplus + consumer surplus = social benni t

If tax increases, or decreases, then due to the shift in the supply, there are certain parts in the
graph which go unitilised, which are known as deadweight loss as they do not contribute anything
to the society.

Wellfare analysis

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 UNIT 2

The budget Constraints :

Any point on the budget constraint line indicates the consumer’s combination or tradeo between
two goods.

• the line basically denotes the constraints a consumer has in his budget.
• the slope of the budget line (later the indi erence curve) measures “how much of this thing the
consumer can let go to have this much of some other thing” (read later MRS) .

The indi erence curve shows bundles of goods that make the consumer equally happy.

Properties of indi ernce curves:

• higher the curve, more the satisfaction
• they are downward sloping
• cuves do not cross (why?)
• bowed inwards

MRS (Marginal rate of substitution) : shows the rate at which consumer is willing to trade pepsi
for pizza. The quantity of pepse the consumer must be given in exchange for 1 pizza.

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 2 Extreme examples of indi erence curves:
perfect substitutes and perfect compliments (both are straight lines)

Consumer optimum occurs at the point where the highest indi erence cuerve and the
budget contraint are tangent.

Unit 2 : Market Structures (Ma’am’s Favourite)

Market structures are of ve types:
1. Perfect competition (not in syllabus)
2. Monopoly
3. Monopolistic competition
4. Oligopoly competition
5. Duopoly competition

What is perfect competition?: (DNE today) you have a large number of buyers and sellers (for n
sellers, n buyers) & all of them are selling the same products.

Monopoly:
• Only one seller of a product.
• One can also be considered as a monopoly if it has a HUGE market share - like AMD &
NVIDEA for GPUs.

Why monopolies arise?:

1. Barriers to entry:
Ownership of a key resource.
The government gives a rm some exclusive orders to some companies

P = AR>M

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 Price Discrimination

Both monopoly and oligopoly practice price discrimination the most.

It means: Selling the same good at di erent prices to di erent customers, even though the cost of
production is the same.

In order to price discriminate, the rm must have some market power.

There are three degrees of price discrimination: 1st, 2nd and 3rd.

1st Degree price discrimination

when the seller is able to charge the maximum of each consumer is willing to pay for each unit.

2nd degree
charging a di erent price for di erent quantities such as quantity discounts for bulk purchases.

3rd degree
charging di erent price to di erent consumer groups. (also stu like pros and cons for being
someone like older person etc, also di erent prices for di locations - say downtown dubai and old
dubai - two VERY di erent house/rent prices)

Characteristics of Monopolistic competition

1. Large number of buyers and sellers
2. Di erentiated products (products are close substitutes of each other but not identical - soaps,
watches, perfume, laptops, bla bla bla majority of products today are monopolistic competition)
3. Free entry and exit.
4. Non price competition. (factors like how strong your marketing and advertising is etc, includes
sponsers and everything)
5. Imperfect information (they dont really know whats going on on the other side of the game - so
neither of the parties can exploit anyone over here)

when due to the decisions of two parties, one party is being harmed, it is negative externality and if
the third party is beni ted, it is positive externality. (trump doing negative externality)
Mostly all the things have positive and negative externalities.

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 R

If the price is lower than the aferage total cost then the monopolist will exit the market.xw21dw2`s
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