1.

INTRODUCTION
1. CONCEPT
Economics refers to the study of unlimited human wants with relation to the scarce resources.

However, there have been quite a few definitions relating to wealth, welfare, scarcity and growth; with
reference to different time periods.

 Wealth definitions were made out by classical economists such as Adam Smith, who considered
economics totally about earning and spending material wealth.
 Welfare definitions were posed by neo-classical economists like Prof. Alfred Marshall, Canman,
etc. This studied economics as a study of relation between material requisites and its use for
man’s welfare.
 Economics was defined by Robbins as a neutral science which studied relationship between
human wants and scarce resources in relation to human choices.

2. CENTRAL PROBLEMS OF AN ECONOMY

 What to Produce: Kind and quality.
 For Whom to Produce: Status of people.
 How to Produce: Labour Intensive or Capital intensive.

3. TYPES OF ECONOMICS
i. Positive Economics
 Grounded on facts
 Descriptive
 What is?
 Describes the issue
 Can be tested
 Deals with present
ii. Normative Economics
 Grounded on opinions and judgement
 Prescriptive
 What ought to be?
 Prescribes the solution
 Can’t be tested
 Deals with future
4. BRANCHES OF ECONOMICS
i. Micro Economics: Focuses on behaviour of individual economic agents.
ii. Macro Economics: Focuses on aggregate measures.

5. TYPES OF ECONOMY
i. Market or Capital Economy: Focuses on profit making, privately owned and capital
oriented.
ii. Social Economy: Focuses on welfare and uses labour intensive techniques.
iii. Mixed Economy: Have elements of both the above.
 2. CONSUMER BEHAVIOUR
1. CONCEPT
Utility is the wants satisfying power of a commodity.

There are two kinds of utility measures:

i. Cardinal Utility
 Propagated by Prof. Alfred Marshall.
 This theory suggests that utility can be measured and added by using alternatives.
 Units for measuring utility are called ‘utils’.
ii. Ordinal Utility
 Propagated by Hicks and Allen.
 This theory suggests that utility can’t be measured but compared.
 Alternatives can be ranked according to their utility.

2. LAW OF DIMINISHING MARGINAL UTILITY

 Law of Diminishing Marginal Utility is based on the theory of Cardinal Utility.
 Total Utility: Total satisfaction gained from consuming commodities.
 Average Utility: Average satisfaction gained from consumption of a unit of commodity.
 Marginal Utility: Satisfaction gained from consumption of one more unit of the same
commodity. MU=^TU/^Q=TUn-TUn-1
 LDMU states that as consumption increases more and more, MU diminishes with consumption
of every new unit.
 Assumptions:
i. Cardinal utility
ii. Continuous consumption
iii. Rational Consumer
iv. Same commodity of same quality
v. Standard units
vi. MU of money remains constant
 Exceptions:
i. Money
ii. Addiction
iii. Rare articles
 Example:

Units TU MU
1 10 10
2 18 8
 3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

35

30

25

20
TU
15
MU
10

0
0 1 2 3 4 5 6 7 8
-5

3. INDIFFERENCE CURVE
 DMRS: The concept of Diminishing Marginal Rate of Substitution states that to consume more of
other commodity, the primary one must be left. No two commodities can be consumed
increasingly simultaneously.
 IC is a representation of all different combinations of commodities which provide the same level
of satisfaction when consumed.
 Assumptions:
i. Rationality (to maximise satisfaction)
ii. Ordinal Utility
iii. No change in preferences
iv. No saturation (Consumer has not reached the point of satiety)
v. Diminishing Marginal Rate of Substitution
 Example:
 X Y
12 2
6 4
4 6
3 8
2 12

Y
14
12
10
8 Y

6
4
2
0
0 2 4 6 8 10 12 14

 Features:
i. Downward Sloping
ii. Convex (Because of DMRS)
iii. High IC gives high satisfaction (More commodities)
iv. No 2 ICs can intersect (Because of transitivity)

4. BUDGET LINE
Budget Line refers to a line representing the combination of a maximum of 2 commodities which can be
bought by a give level of income.
5. CONSUMER EQUILIBRIUM
 Consumer equilibrium refers to the state in which a consumer is able to attain the maximum
satisfaction with a given level of income and price of commodities.
 Point of CE is at MRSXY= PX/PY
 3. DEMAND
1. CONCEPT
Demand refers to the desire for a commodity given the willingness and ability to purchase.

The amount of the commodity which consumers wish to purchase at a given price is called quantity
demanded.

2. FACTORS AFFECTING DEMAND

Individual Demand

 Price
 Price of related goods (Substitutes and Complements)
 Income of consumer (Causes shift in curve)
 Tastes, preferences and fashion
 Future Expectations
 Credit Policies
 Govt. Policies
 Advertisement
 Climate and Weather

Market Demand

 Climate and Weather

 Govt. Policies
 Income Distribution
 Technical Progress
 Size and Composition of Population

3. DEMAND CURVE
Demand Curve represents the demand for a commodity at various prices, holding non-price
factors constant.

3.1 Features
 Downward Sloping (Inverse Relation)
 Never touches the axes
 Also called ‘Demand function’
 3.2 Shift
Shift in Demand Curve represents the change in demand at all
prices due to change(s) in non-price factors like income level,
price of related commodities, etc.
Right shift shows increase in demand and vice versa.
e.g. Increase in income would increase one’s ability and
willingness to pay more and demand increase irrespective of
price.

3.3 Change in Quantity Demanded

Change in quantity demanded refers to the change in demand due to
change in price while other factors remain constant.

As the price increases, QD decreases and it is called Contraction.

As the price decrease, QD increases and it is called

Extension/Expansion.

*Market Demand is just the aggregate of individual demands.

4. LAW OF DEMAND
LoD represents that there is a functional and inverse relationship between the price and quantity
demanded of a commodity, other factors being constant.

Downward-sloping curve because:

 Price Effect: Change in demand due to change in price of commodity.

 Income Effect: Change in demand arising due to change in real income of consumer.
 Substitution effect: Change in demand due to change in relative prices.
 LDMU applies
 Other factors remain constant
 Diverse uses of a commodity

4.1 Exceptions to LoD

 Veblen Effect/Articles of Distinction/Snob Effect: Goods which are rare or unique and
give rich class a feeling of superiority. Named after Thorstein Veblen.
 Giffen Goods: Termed by Robert Giffens, it states that quantity demanded and price of
inferior goods are in direct relation. E.g. Subsidised grains.
 Future Expectations: If prices are expected to grow higher in the future, people tend to
buy more in present, and vice versa.
 Necessities: Demand of necessary commodities like medicines and modern day
necessities like TV, refrigerators, etc. are not affected by the price changes.
 Consumers’ Ignorance
  Situations of Crisis: In situations of crisis like COVID 19 pandemic, people tend to stock
items fearing from unavailability in future.

5. ELASTICITY
It is the ratio of change in quantity demanded with relation to change in price.

i. Perfectly Elastic: %^Q/%&^P=∞

ii. Relatively Elastic: %^Q/%^P>1
iii. Unitary: %^Q/%^P=1
iv. Relatively Inelastic: %^Q/%^P<1
v. Perfectly Inelastic: %^Q/%^P=0

6. DEMAND FORECASTING
It is the prediction of a firm’s products’ demand in future.

It is necessary for preparing budget, employment stabilisation, expansion of firm, etc.

6.1 Factors affecting Demand Forecasting

i. Time period
ii. Level of forecast
iii. General or Specific forecasts
iv. Product classification
v. Other factors like population changes, distribution of income, etc.

6.2 Methods
i. Interview and Survey Approach
 Opinion Polling
 Collective Opinion
 Sample Survey
 Composite Management Opinion
 Panel of Experts
ii. Projection Method

6.3 Interview & Survey Methods

i. Opinion Polling: Direct or indirect collection of info from market research dept. or
wholesalers and retailers. It is worth when consumers are less, sure of budget and in
short-time period.
ii. Collective Opinion Method: Forecasts are made on the basis of collected value
judgements of various managers mostly by large firms. It is useful for short time
periods.
 iii. Sample Survey Method: Sample of consumers is selected and info is collected. There
should be random selection, no bias, etc.
iv. Panel of Experts: Persons from within the organisation and outside the organisation are
involved. The process is more useful if statistical analysis tools are used.
v. Composite Management Opinion: Opinions of various managers are collected and
general managers analyse them.

6.4 Projection Approach

i. Correlation Analysis and Regression: Two variables are taken together and their past
info is analysed.
ii. Time Series Analysis

6.5 Methods to Bring in New Products

i. Evolutionary Method
ii. Growth Pattern
iii. Substitution Method
iv. Opinion Polling
v. Sample Survey
vi. Indirect Opinion
 4. SUPPLY
1. CONCEPT
Supply is the willingness to sell a specified quantity of a commodity at a given price and point of time,
ceteris paribus.

SUPPLY

INDIVIDUAL MARKET

1.1 Factors Affecting Supply

i. Price
ii. Price of Related Goods
iii. Cost of Production
iv. Future expectations
v. Market Demand
vi. Natural Conditions
vii. Govt. Policies
viii. Taxation Policies
ix. Industry Structure
x. Infrastructural and Technological Conditions

2. LAW OF SUPPLY
LoS states the relationship between supply and price of commodity. It states that the quantity supplied
increases with the rise in the price and vice versa, ceteris paribus.

Price Quanity
5 3,000
10 8,000
15 12,000
20 15,000
 Y-Values
25

20

15
Y-Values
10

0
0 0 0 0 00 000 000 000
00 00 00 00 ,0
2, 4, 6, 8, 1 0 12
,
14
,
16
,

Individual Supply Curve

*Market Supply is just the aggregate of different individual supplies.

2.1 Exceptions
 Agricultural Products: Dependent on so many uncontrollable factors that one can’t increase the
produce even if price was high.
 Auction: Supply of auctioned items can’t be increased even if the bid is high.
 Future Expectations
 Labour supply
 Monopoly
 Perishable Goods
 Closure of Firm

3. CHANGES
3.1 Shift
Rightward and leftward shifts due to changes in other factors rather than the price.
 3.2 Contraction and Expansion
Changes in quantity supplied due to changes in change in price.

4. ELASTICITY
i. Perfectly Inelastic: ^S/^P=0
ii. Relatively Inelastic: ^S/^P>1
iii. Unitary: ^S/^P=1
iv. Relatively Elastic: ^S/^P<1
v. Perfectly Elastic: ^S/^P=∞

5. DEMAND-SUPPLY EQUILIBRIUM

There might be changes in demand and supply which affect each other to gain equilibrium. These
changes are primarily by external factors rather than price.
 5. COSTS
1. COSTS
Cost refers to the money incurred to produce a level of output.

1.1 Types of Costs

i. Accounting Cost: Explicit money costs.
ii. Economic Cost: Payment to resource owners in order to ensure consistent supplies.
iii. Opportunity Cost
iv. Implicit & Explicit Cost: Implicit cost on owned capital, explicit cost on outside services
like wages, interests, etc.

1.2 Other Production Costs

i. Fixed & Variable
ii. Avoidable & Unavoidable
iii. Short Run and Long Run
iv. Incremental & Sunk Costs: Incremental costs increase with expansion, and sunk costs
remain same with expansion.
v. Common & Traceable: Common costs are common to all the products, and traceable
costs are specific for products and therefore traceable.

1.3 Law of Variable Proportions

total physical product (TPP)
average physical product (APP)
marginal physical product (MPP)