MICROECONOMICS - Introduction

An economy is not used only in the context of money/cash. It is a whole system that provides people the means to
work and earn a living. It entails 3 key activities:
- Consumption, Production and Capital Formation (Investment)

Interestingly, if you see this, then it is a cycle.

Take for eg:
Dev makes an investment in property. He also buys machines to produce a soft drink.
This is his investment.
He then gets some labor to do the work and carry out the production. He brings it to the market by hiring a truck
driver for transportation in bulk.
This is production
Then people buy and consume it in exchange for money.
This is consumption
Now these consumers might have some investment somewhere else too. And this is how it is a cycle.

Why study it? To deal with the problem of scarcity. You need to understand how to better allocate resources
(especially the ones depleting) to sustain human wants and needs. You will have to economize here - making
optimum use of available resources.

Scarcity means a shortage of some commodity in supply vis-a-vis its demand. But apart from this, resources also
have alternate uses: petrol used in automobiles and machines. And this results in the problem of choice.

Economic Problem?
Unlimited wants but limited resources.

Economics is a social science that studies how society used limited resources to produce goods and
services and then distribute them to people for consumption - imp

Positive economics - fact study (what was, what is, and what will be). This may be true or false
Normative economics - deals with how things should be done (what ought to be)
*table important

Micro - Adam Smith is the father

It has more to do with individual units of the economy, like the income of one person.
Macro has more to do with the aggregates (sum of micro entities) of the economy as a whole, like the GDP of the
country.
However, they are interrelated!!

Micro-macro paradox.
I save, and then it will benefit my parents, but what if all the people save? It can lead to major problems like
unemployment and less demand and hence less output.

Central problems in an economy:

What to produce? Allocation to resources becomes important
How to produce? Labor intensive or capital intensive (techniques of production)
For whom to produce? For you know that for every good or service, people have to pay, and that will be directly
linked with how the income is distributed. - Personal distribution among different groups or functional distribution
among different factors of production (FOP)

FOP - Time, place, people and capital

Opportunity cost—the cost of the next best alternative foregone. If you are teaching at 5000, you could have done
photography at 2000
But you choose it because 5000 > 2000
So the cost of teaching would be 2000 (the money foregone from what you could have done instead)
PPF is the Production Possibility Frontier graphical representation of the possible combinations of two goods that
can be produced with given resources and technology
Assumption - another ball game in economics
You cannot define or implement theories until and unless we have assumptions established.

For PPF we assume that there are onyl 2 goods, resources are limited, fixed and are fully/efficiently used

Marginal Opportunity Cost (MOC)

It basically states the number of commodity sacrificed to gain more commodity of another unit. It will always
increase as the sacrificed commodity is proportional to the gained commodity.

Marginal Rate Transformation(MRT)

Unit Sacrificed/ unit gained

PPF can be a straight line if MRT = 1 i.e unit sacrificed/unit gained=1

PPF can be concave or straight but will never be convex in shape because the MRT never decreases.

There can be a rightward or leftward shift in PPF.

The rightward shift can be when the efficiency of machines increases i.e more machines are installed.
The leftward shift in PPF can be seen when the equal number of machinery is destroyed or becomes unusable for
any reason.

The rotation of PPF is almost similar to the rightward or leftward shift but in rotation only one axis(x or y) are
affected.

CONSUMER EQUILIBRIUM - Dev to make notes

Demand

Let us first understand the difference between desire, want and demand.
Desire is simply a wish.
Want is a wish that is backed by ability and willingness to actually satisfy it
But when we talk about demand, it is the quantity of a commodity that a consumer is willing and able to buy,
at each possible price during a given period of time.

Determinants od demand (factors affecting it)

Price of a good - goes up, demand comes down

Price of related goods (important):

- Complementary goods: goods that are used together or are complement to each other. For example, bike
and petrol, TV and remote etc.
If price of TV goes up, demand for it will fall and then of remote too

- Substitue goods: goods that are used for the same reason. They substitute each other. For example, coke
and pepsi
If the price of coke goes up, will will want to switch to pepsi so its demand will rise

Income of the consumer: income goes up, demand goes up too but this depends on the type of good you are
using:
Normal good: these are comfort goods or basic goods like food, clothes, TV. So if you earn more, you want more
of these or better of these
Inferior goods: this are the goods whose demand will fall if your income increases. Like a poor family eats bajra
roti daily, but if they earn more, they will want wheat and this will lead to a fall in bajra’s demand

Tastes and Preferences: change in fashion sense, habits will affect demand
Expectation of change in future price: if you think it will increase in future, you will demand more now. Like when
COVID happened, people knew that because of lockdowns prices will rise and they hoarded stuff at their homes

VVV IMP: change in the quantity demanded only happens when it is impacted by price change. In rest of the
cases you call it change in demand.

We also have some determinants of market demand - size and composition of the population, season and
weather and distribution of income (remeber we talked about functional and personal distribution)

Demand function:
Dx = f (Px, Yx, T, Pr, F)

Demand Schedule:
It is a tabular representation of different quantities of goods demanded at different levels of prices over a given
period of time
There are two schedules - individual and market

About properties of the demand curve:

- Inverse relation: reason is that the downward sloping demand curve
- market demand curve is the aggregation of individual demand curves so it will be flater
- Slope of the demand curve is change in price / change in quantity demanded and it should always be
negative (tell me why)

Law of demand - When the price of a commodity increase, keeping other things constant or ceterus paribus, the
demand of that commodity will fall and vice versa.

This law is derived from the following two concepts:

Marginal Utility - utility of satisfaction from an additional unit consumed. The lower the price the more MU
Law of Equi-Marginal Utility - a consumer will only in equilibrium if he spends his limited income in such a way that
MUs/price ratios of 2 goods are equal

MUx/Px = MUy/Py
Now apply logic, if the price of x will increase, what will happen??

Reasons for Law of Demand:

1) Law of Marginal Diminishing Utility - after a point of time in consumption the utility starts decreasing
2) Substitution Effect - you will buy the cheaper good (remember in case of substitutes)
3) Income Effect - don’t confuse this with general income. This mainly means that when the price of a
commodity increases, your purchasing power or the real income will fall.
Example - I earn Rs 10 daily, now I buy a good in Rs 7. The price of that good increases from Rs7 to Rs
10 so then this is a no show coz I am still earning just Rs 10.
4) Additional consumers: this happens due to a fall in price
5) Different uses: more price, you will put the good to more important use and vice versa

BUT…. There are exceptions too!

1) Giffen goods - for this special type of goods, the demand increase with an increase in price. Like jowar and
bajra
2) Status symbol or goods of ostentation - watches, diamond jewellery etc
3) Fear of shortage - people will buy more even if the price is more.
Ex: the price of flights went straight up from Kashmir coz of the recent attacks
4) Ignorance - people might not know the right price
5) Fasion related goods - zara, H&M demand trend. It is opposite to the law
6) Necessities - rice, wheat, salt (you buy so you buy irrespective of the prices)
7) Change of weather - winters, prices of sweater goes up and so does the demand

Demand expansion - when the quantity consumed increases coz of a fall in price. Downward arrow along the
curve
Demand contraction - when the quantity consumed falls coz of a rise in price. upward arrow along the curve
Increase/Decrease in the demand curve - this results in the shift in demand curve. This happens when factors
other than price changes so the point on y-axis remains constant
Let us do some exercise - think of every factor
THE TABLES ARE VERY VERY IMPORTANT

*the demand curve of a substitute good is upward sloping. Why?

Cross Demand - it refers to the relationship between the demand of a given commodity and the price of related
goods other things remaining constant.
Positive in case of substitutes and negative in case of complementary goods

When the income increases, the demand curve shifts to the right and vice versa
Read all the cases