1
Introduction
➢ Definition of Economics
o Wealth – Is the science of creation and consumption of
wealth. Given by Adam Smith (father of economics). It was
criticized as man was given the secondary importance and
wealth primary.
o Scarcity – Given by Prof Robbins- Is the science which deals
with human behavior in relation to scarce means (with
alternative uses) and ends. (three things to note in the
definition are ends are unlimited, means are limited and
means have alternative uses)
➢ Factors of Production (FoP)
o FoP are the different inputs that are required/needed for
producing and supplying the goods in the economy. The
factors of production are classified into 4 types
▪ Land – Anything that is naturally available such as
minerals, land used for infrastructure, agricultural
output etc.
▪ Labour – The human labour is required to produce the
goods
▪ Capital – The capital refers to the anything that is
manmade. These produced by humans will be further
used to produce the goods. Examples are machines,
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
infrastructure (such as manufacturing factories, roads
etc.)
▪ Entrepreneurship – Refers to the one who has taken
the risk to put together all the above
factors/resources.
o When the companies purchase these factors, the company
must pay money. This is the expenditure incurred and is
referred to as the Factor Cost. On the other hand, the one
who has provided/supplied these factor services (such as
labour, land etc.) will receive payment and this is referred to
as Factor Income.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Types of economies
Features Capitalism Socialism Mixed
Economy
Factors of Private Government By both
production are Enterprises
controlled by
Role of the Minimal Maximum More of
government providing a
conducive
environment
Price Market forces Government to Both
determination will decide decide (government
in some cases
and market in
others)
Competition Very high Almost absent high
Motive Profits Social welfare both
Exploitation (of Yes No No
factors of
production)
outcomes social strata, Wage gaps Prominence
increasing minimal, given to both
income gap, prominent role public and
thriving public of PSEs private sector
sector etc. enterprises
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Consumer buying behavior - the consumer considers the
following parameters before making the decisions to buy a
product
o Price of the product
o Price of the related goods/substitutes
o Preference/taste
o Income
➢ Law of demand – Keeping all the factors constant (ceteris
paribus), if the price of the good and the demand move in
opposite direction. The graphical representation of law of
demand is sloping downwards because
o The rise in price leads to reduction in the purchasing
power
o With the prices becoming higher, some users shift to a
substitute
o Law of diminishing marginal utility (as we consume more
units of the same product, with consumption of each unit,
the satisfaction/utility keeps on reducing hence the
willingness to pay the same amount and hence the
demand) leads to lowering of demand
➢ The supply depends on
o Price of the commodity
o Price of related goods
o Change in technology
o Taxes and subsidies
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
Law of Supply – Now keeping all the things constant (ceteris
paribus), the price and supply if price of a good increases, the
supply increases and decreases with decrease in price. This
happens from the perspective of the supplies and since there is
an increase in the price this acts as an incentive for the
producer to produce more, hence the supply curve is upward
sloping.
➢ Market equilibrium and dis-equilibrium
The demand and supply curves intersect at a point, which
represents market equilibrium. This represents a quantity
being supplied which is equal to the quantity demanded and at
the same price. Whenever the price goes above the equilibrium
price, supply becomes greater than demand hence the sellers
start competing, hence leading to reduction in prices. When
the price becomes lower than the equilibrium price, the
demand is higher than supply, hence there will be more buyers
compared to sellers. In this scenario the prices will keep
increasing.
➢ Movement along the curve and shift of curve – Whenever
there is a variation in price and quantity, there is a movement
along the curve and whenever there are variations in other
factors such as price of other goods, change in taxes, change in
the income, changes in subsidies etc, will lead to either the
curve shifting to left or right.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
➢ Goods – Are tangible i.e. physical attributes are present (eg-
weight, width etc)
Services – Are intangibles i.e. do not have physical attributes (eg-
haircut, car wash etc)
➢ Types of goods – Based on who produces it (public good and
private good), based on stage of production (Intermediate and
final good), based on whether good for society or not
o Normal goods – As the income increases, the consumption
of this good increases
Inferior goods – As the income increases, the consumption
of this good comes down
o Giffen goods – As the price falls, the demand also falls
Veblen goods – As the price increases, the demand also
increases
The above two goods, defy the law of demand. In case of the
first one, these are very inferior goods which are consumed
by very poor. On the other hand, the latter are very
luxurious goods which are consumed by ultra rich.
o Public good – Available to all equally (non-excludable) and
consumption is not restricted to the existing customers
(non-rival). eg-public transport, public roads etc
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
Private good – Available to those who pay for it (excludable)
and are unavailable for consumption for others (rival). Eg -
private education, car etc)
• Non-rivalry (consumption of this good does not
reduce the amount available to others).
• Non-excludable (people cannot be excluded from
consumption of this).
• Rival - Consumption of this good prevents others
from consuming this good.
• Excludable - People can be excluded from
consumption of this i.e. people will have to pay to
consume
o Intermediate good – Remain in economic flow (eg-cement,
steel, flour etc)
Final goods – Goods are not in the economic flow and are
for consumption purposes (eg-bike, car, bread etc)
o Complementary goods – Set of two or more goods, which
on combination satisfy a need. (eg-bread and butter, shoes
and socks etc)
Substitute goods – Two or more goods which independently
satisfy the same need (hot beverages such as-
tea/coffee/milk etc)
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Merit good – The consumption of this good is considered
good for the society (education, health etc). These have a
positive externality
Non-merit good – The consumption of this good is
considered unfavorable for the society (ex – tobacco,
alcoholic beverages). These have negative externality.
➢ Economics is basically divided into
Micro-economics Macro-economics
Deals with individual as Deals with economic aggregates
economic units
Deals with individual income, Deals with aggregate income,
individual demand, individual total output, inflation etc
output etc
The main aim is to determine Main aim is to look at growth in
price mechanism, optimal aggregates with stability.
allocation of resources etc
➢ Since the resources are limited, the allocation has to be done
keeping in mind the tastes/preferences of the people or else the
resources will be wasted (either in the form of overproduction or
underproduction).
The scarce resources have competing usages and hence gives rise
to the problem of choice. The problem of choice when resources
are used for production of one good leading to unavailability of
these resources for production of another good/s is referred to
the opportunity cost.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
Hence the questions arise
o What to be produced and in what quantities?
o How many resources to be used?
o To whom these products to be distributed?
The central problems of the economy are
o How to allocate the scarce resources?
o How to distribute the final goods and services?
➢ PPF (Production Possibility Frontier) - The collection of all the
possible goods and services that could be produced from limited
resources that are available is referred to as production possibility
set and the curve that is represented by taking all these
possibilities represents the PPF.
➢ Circular flow in the economy
o Two sector – Only households and firms are present. The
households provide factor services for which they receive
factor payment. The firms produce and sell goods for which
they receive payments.
o Three sector – In the economy apart from firms and
households there is also the presence of government. The
government collects revenues from households and firms
and makes an expenditure in the form of subsidies, tax
exemptions and provision of services
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Four sector – The three domestic economic entities-
household, firms and government not only interact with
each other but also interact with the external world. The
government borrows or lends; the firms either import or
export; households import the goods and also provide
labour services.
➢ Elasticity – It measures the variation in the demand/supply
whenever there is a change in variable such as income, price
etc. The different types of elasticities are
o Price elasticity of demand
%age Change in the demand of product x
PED =
%age change in the price of product x
Elasticity Note
PED<1 Inelastic Usually, the essentials
PED=1 Unitary A unit change in price leads to
elastic unit change in demand
PED>1 Elastic luxuries
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
o Income elasticity of demand
%age Change in the demand of product x
IED =
%age change in the income
Note Type of good
IED<0 There is fall in the demand Inferior good
with the increase in the
income
IED>0 There is rise in the Normal good
demand with the increase
in the income
o Cross elasticity of demand
%age Change in the demand of product x
CED =
%age change in the price of good y
Note
CED<0 Complementary goods
CED=0 Unrelated goods
CED>0 Substitutes
o The elasticity is influenced by other determinants
▪ Availability of the substitutes
▪ Is the good essential or non-essential?
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)
▪ There may not always be a change in the demand as
a reaction to price take a bit of time (time horizon)
▪ Effect on the budget/expenditure
o Uses of Elasticities
▪ Impact of price variations on the revenues of the
firm
▪ The consumption and savings behavior of the
economy
▪ Impact of changing incomes and the impact it has
on the consumer behavior
▪ Impact of price variation decisions such as
government taxes, fuel costs etc on the consumer
behavior etc
➢ Engel’s law – With the increase in the income there is
proportionately lesser expenditure on food. For the necessities
such as food items, the Income Elasticity of Demand lies
between 0 and 1.
SHYAM SHANKAR KAGGOD
(EDUCATOR, DIRECTOR - ACADEMICS, UNACADEMY)