Notes for Economics

1. Demand is the amount of goods or services a consumer is able to and willing to buy at a

given time and given price.

Law of Demand: Quantity demanded is inversely proportional to the price.

Factors effecting demand

Price of related goods Preferences Income Number of buyers Future expectation Technology

Advertisement Fashion Price Season Interest rate

2. Supply is the quantity of goods that a seller is able to and willing to supply at a given

time and at a given price.

Law of Supply: Quantity supplied is directly proportional to price. This law holds if every

other factor except price remains constant.

Factors effecting supply

 Price of related goods Cost of production Future expectation of price Number of sellers/suppliers

Productivity Tax Subsidy Natural disaster

3. Market Equilibrium occurs when the quantity demanded becomes the equal to the

quantity supplied.

P = Equilibrium Price

Q = Equilibrium quantity

Surplus: Quantity supplied>Quantity demanded Shortage: Quantity demanded>Quantity supplied

4. Elasticity is a tool which helps in describing the response of suppliers and consumers.

a) Price Elasticity of Demand (PED) is the responsiveness of a demand to a change in

price. PED = %change in QD of good % change in price of good Value of PED ranges from 0 to PED is always negative but it just simply states that QD of good is inversely proportional to the price. So, we ignore the negative sign.

Types of PED
1) Unit elasticity The value of PED is equal to 1. 2) Elastic demand The value of PED is greater than 1 but less than . 3) Inelastic demand The value of PED is greater than 0 but less than 1.

Factors effecting PED

The availability of substitutes Degree of necessity Time period Proportion of income spent on a product

b) Income Elasticity of Demand (YED) is the responsiveness of demand to a change in

income. YED = % change in QD % change in income When YED is (+), then the goods are normal goods. When YED is (-), then the goods are inferior goods.

Types of YED
1) Income inelasticity The value is between 0 and 1. 2) Elastic income The value of YED is between 1 and . 3) Unit elasticity The value of YED is 1.

Factor effecting YED

Type of good (necessities or luxuries)

c) Cross Elasticity of Demand (XED) measures the response of consumers when the
price of substitute changes. XED = % change in QD of good A % change in price of good B If the value of XED is negative, then the two goods are said to be complements of each other. If the value of XED is positive, then the two goods are substitutes. If the value of XED is zero, that means the goods are not related to each other.

d) Price Elasticity of Supply (PES) is the responsiveness of supply to a change in price.

PES = % change in QS % change in Price The value of PES is always positive. The value of PES ranges from 0 to . The value of PES can also be 0 and .

Types of PES
1) Inelastic supply The value of PES is between 0 and 1. 2) Elastic supply The value of PES is between 1 and . 3) Unit elasticity of supply The value of PES is equal to 1.

Factors effecting PES

Time period Storage possibility Rise in cost due to increased output Production Possibilities Producer substitutes and the mobility of production factors. 5. Total Cost, Average Cost, Revenue and Profit and Loss

Total cost is the cost of producing any given level of output.

Total cost = Total fixed cost + Total variable cost Fixed cost is a cost which does not vary directly with output. Variable cost is a cost which varies directly with output.

Average cost is the average cost of production per unit.

It is of 3 types:

1) Average Fixed cost (AFC) is the total fixed cost per output.
AFC = FC Q

2) Average Variable cost (AVC) is the total variable cost per unit output.
AVC = VC Q

3) Average Total cost (ATC) is the total cost per unit of output.
ATC = AFC + AVC ATC = FC + VC (OR)

Revenue is the amount of money received by selling a certain number of goods.

Revenue = No. of goods x Cost of one good
For example: At point D, the revenue = 110 x 1 =110$

Profit and Loss

Profit is the difference between Total money earned and Revenue.
Profit = Total money earned Revenue. When profit is (-), then its loss. 6. Opportunity Cost is when choosing between different alternatives it is the benefit lost from the next best alternative.

Production Possibility Curve shows the maximum amount of different goods and
services that can be produced by the available factors of production. We cannot produce goods and services outside the curve so point D is unattainable. At point C, there is either misallocation of resources or there are unused resources. So, to get the maximum efficiency, goods should be produced on the curve such as point A and point B.

7. Specialization means dividing work into smaller and more specialized jobs. It is also called Division of Labor.

Advantages of Specialization for Individuals

Jobs become simpler. Job is less time consuming. Job is done more efficiently. The demand for worker is due to specialization. Productivity of a per son increases. Salary of a person increases.

Disadvantages of Specialization for individuals

Repetitions of jobs make it boring. Switching over to other jobs becomes difficult. If the demand for a particular job goes down then the specialized person becomes jobless. Productivity decreases.

Advantages of Specialization for company

Company can reduce cost of production due to increased efficiency of workers. No time and money is lost for training people. Chances of making mistakes are less. Specialized people are easier to be hired.

Disadvantages of Specialization for company

Due to repetition of work, people might lose interest in companys job. If different stages of production are interdependent and if people of one of the units do not come then the whole process of production gets disrupted. 8. Trade Unions are organizations that exist to protect the interests of workers. Trade unions exist to further the interests of their own members. Trade unions will be more powerful the larger the trade membership, the less elastic the demand for labor and the greater the profitability of employer.

The man aims of trade unions are to:

Negotiate pay and working conditions with employers.

 Provide legal protection for members such as representation in court if an employee is fighting a case against employer. Put pressure on the government to pass legislation that improves the rights of workers. Provide financial benefits such as strike pay whenever necessary. Done By: Hazel Grade - 9