Economics Basics

By Currenc-I,Econpmics Club, IIM Indore

Macro Vs Micro
!! The two major divisions are Macro and Micro
Economics

!! Macro : Provides a holistic view about the economy

that covers GDP , Inflation, Monetary and fiscal policies, Unemployment, BOP ( balance of payment) and growth rate of the economy etc. units which covers the factors that affect the demand and supply, prices of the goods and elasticity etc.

!! Micro : Analyses the individual decision making

Micro Economics
Demand & Supply

!! Demand- Quantity expected to be purchased by

consumers at different price levels different price levels

!! Supply- Quantity supplied by the industry at !! As the price of good increases demand falls

(consumers do not prefer the good due to high price) and supply increases (manufacturers gets more revenue due to increased price) an upward sloping curve

!! Hence demand is a downward sloping and supply is !!

Equilibrium level is given by the point of intersection and the corresponding price is equilibrium price

Elasticity
!! Elasticity is a measure of ratio of percentage change in one
variable to percentage change in other variable response to change in price of the good
!!

!! Price Elasticity Measures change in quantity demanded in

Price Elasticity = Q(%age Change in Demand) / (P %age change in Price)

!! Income Elasticity- Measures percentage change in quantity

demanded due to change in income
Income)

!! Income Elasticity = Q(%age Change in Demand) / I(%age change in

!! Note- The above quantities measure price and income

elasticity of demand. Similarly there can be elasticity of supply where the numerator is replaced with change in quantity of supply.

Perfect Elasticity
!! The demand is perfectly
elastic at price $15 demand is zero

!! At any other price point !! This is an example of

perfectly elastic demand curve infinitely elastic curve

!! The curve is also called

Perfectly Inelastic
!! This curve represents
perfectly inelastic or zero elastic demand curve demand remains at a particular quantity irrespective of the price level the supply side curve E.G. There can be perfectly inelastic supply curve

!! The curve shows that the

!! The same can be applied for

Types of Markets
!! There are four different types of markets
!! !! !! !!
Perfectly competitive Monopoly Monopolistic competition Oligopoly

Perfectly Competitive Market

!! There are many players with each one holding a small
market share

!! There are no entry and exit barriers i.e. It is easy to

enter and exit the business are identical

!! All the products produced by different manufacturers !! Prices are determined by demand and supply of the
product, not by the firm demand curve

!! Perfectly competitive firms have perfectly elastic

Monopoly
!! There is one supplier in the entire market who produces
a product which is exclusive and has no good substitutes !! Legal Barriers !! Natural Barriers

!! The barriers to entry are very high

!! Patents copyrights and government franchisees are few

legal barriers

!! Natural Barriers- A firm can reduce the cost of

production by producing more (Economies of Scale) and they sell at a cheaper price which cannot be done by other players

Monopolistic Competition
!! Large number of competitors produce differentiated
products

!! Product differentiation gives degree of market power to

each firm

!! Firms compete on price quality and marketing due to

product differentiation. Quality is a significant product differentiation characteristic and price is set by the firms based on the demand supply relation enter and exit the business

!! Barriers to entry and exit are low and hence it is easy to

Oligopolistic Competition
!! The market is characterized by small number of sellers !! There is interdependence amongst the sellers and hence
decision by player is affected by other players decisions

!! Products may be differentiated or similar !! Significant barriers to entry due to which each firm has
large economies of scale. Due to significant barriers of entry there are very few players who supply the entire market hence they have large economies of scale

Macroeconomics

Key Economic Parameters

GDP

! Total Market value of all final goods and Services produced within an economy ! Check out GDP/NDP/GNP

Inflation

! Rate of changes in price ! Find out the two main indexes for inflation measurement

Interest Rates

! Real interest rate is the rate at which your money grows after accounting for inflation ! Find out the difference between Real and Nominal Interest rates

Budget Basics
!! Revenue Deficit: Revenue Expd Revenue Receipts !! Fiscal Deficit: Total Expd ( Revenue Receipts+
Recovery of loans + Receipts from PSU disinvestment)

!! Primary deficit: Fiscal Deficit- Interest Payments

Policy Tools
!! Government and RBI uses various tools to influence
the growth of the economy
1.! Control money supply 2.! Control interest rates

!! Monetary policy (RBI) !! Fiscal policy

1.! Manage the government revenue 2.! Manage government expenditure

!! Find out: <CRR, Repo rate, reverse repo, SLR>

Thank You!!!
For any queries contact currenci@iimidr.ac.in