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2. Total Utility. It is the sum total of utility derived
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MICRO
ECONOMICS
from the consumption of all units of a
Central problems of an economy, production
possibility curve and opportunity cost.
An economy is a system that provides people with
the means to work and earn a living in the process
of production.
MICROECONOMICS_ It is that branch of economics
theory which studies the behavior of individual
economics units of the economy i.e. household,
individual firms etc.
MACROECONOMICS_ It is that branch of
economics theory which studies economy as a
whole and behavior of aggregates such as total
output, employment level, and aggregates price
level.
ECONOMICS PROBLEM_ it is basically the
problem of choice which arises because of (1)
Recourses are scarce. (2) Recourses have
alternative uses.
CENTRAL PROBLEM_ It is allocation of resources
or making choices among alternative uses of scarce
resources. All central problem of an economy arise
due to scarcity of resources having alternative uses.
Three fundamental central problems are
(1) What to produce
(2) How to produce
(3) For whom to produce
These problems are solved through price
mechanism in a capitalist economy and through
central planning in a socialist economy.
PRODUCTION POSSIBILITY CURVE- It is a curve
which depicts all possible combinations of two goods
which an economy can produce with available
technology and full and efficient use of recourses.
OPPORTUNITY COST It is equal to the value of
next best alternative forgone.
MARGINAL OPPORTUNITY COST MOC of
particular good is the amount of other good which is
scarf iced to produce an additional unit of that
particular good. MOC is also called MARGINAL
RATE TRANSFORMATION.
CONSUMERS EQUILIBRIUM WITH UTILITY
APPROACH
1. Utility. It is want satisfying capacity of a
commodity.

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3.

4.

5.

commodity. TU = MU
Marginal Utility. It is additional utility when one
more unit of a commodity is consumed.
TU
MUn = TUn - TUn-1 or MU =
Qx
Law of Diminishing Marginal Utility. It states
that marginal utility tends to diminish as more
and more units of a commodity are consumed
by a consumer.
Consumers Equilibrium. It is defined as a
situation when a consumer maximizes his
satisfaction given income and prices.
Equilibrium in case of one commodity X occurs
where:
MUx
MUM
Px
Equilibrium in case of two commodities X and Y
occurs where :
MUY
MUx

MUM
Px
PY
Or
P
MUx
X MUY
MUY
PY

1.

2.

3.

1.

2.
3.

The demand for a commodity is the quantity of


the commodity which the consumer is willing to
buy at a certain price during any particular
period of tme.
In economics, demand means effective demand
which means there should be desire to own the
good, sufficient money to buy it and willingness
to spend the money.
The determinants of an individual household
demand are:
(i)price of the good (PX), (ii) price of related
goods (PZ), (iii) income of the consumer (Y),
and (iv) tastes and preferences of the consumer
(T).
The law of demand states that there is an
inverse relationship between price and quantity
bought of a commodity, ceteris paribus.
The consumptions of the law of demand are
that PZ, Y and T are constant.
The demand schedule gives the data on
changes in quantity bought at different prices in
a particular time period.

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4.

i.

Data
is plotted on a price quantity demanded
4. Proportion of total expenditure spent on the
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axis to derive the demand curve.
product
5. Number of uses of the commodity
The demand curve slopes downward because
6. Time period.
of:
law of diminishing marginal utility (as given by
Marshall),
income effect,
substitution effect, and
new consumers creating demand.

ii.
iii.
iv.

DEMAND AND PRICE OF OTHER GOODS


An increase in the price of substitute will
increase the demand of the other good or shift
the demand curve rightward and the vice versa.
ii.
An increase in price of a complementary good
will lead to decrease in demand of the other
good or shift the demand curve leftward and
vice versa.
CHANGE IN QUANTITY DEMANDED
(MOVEMENT) VS. CHANGE IN DEMAND (SHIFT)
OF DEMAND CURVE
1. Movement along a demand curve occurs due to
changes in the price of the good (Px) itself.
Shift of the demand curve occurs due to
changes in
1. price of other good (PZ),
2. income of the consumers (Y)
3. Tastes of the consumers (T).
2. Movement can be expansion or contraction of
demand whereas shift can be increases or
decrease in demand.
i.

PRICE ELASTICITY OF DEMAND


Price elasticity of demand (eD) measures percentage
change in the quantity demanded of a good due to a
percentage change in its price. Therefore, (eD) can
be calculated as:
Percentage change in demand
(ed )
Percentage change in price
Or

(ed )

Q P

P Q

FACTORS AFFECTINGE ELASTICITY OF


DEMAND- the major determinants of price elasticity
of demand are:
1. Availability of substitutes
2. Income of the consumers
3. Luxuries versus necessities

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MEASUREMENT OF PRICE ELASTICITY OF


DEMAND
The three methods of measuring (ed) are:
1. Outlay or expenditure method
2. Percentage or proportionate method
3. Geometric or point method.
a. In the outlay method, the (ed) is measured on
the basis of change in total expenditure (i.e. P x
Q) due to change in the price (i.e. P) of the
good. If the price of a good falls and, as a
result, total outlay increases then (Ed)>1; if total
outlay remains unchanged, then ed = 1; and if
total outlay falls, then ed < 1.
b. In the percentage method, Ed is calculated by
the formula:
Q P
(ed )

P Q
c. In the geometric method, eD at a point on a
linear (straight) demand curve is calculated as:
Lower segment of the demand curve
E.D
Upper side segment of the demand curve
There are five degrees of Ed
1. Perfectly inelastic demand (Ed= 0)
2. Inelastic demand (0 < Ed< 1)
3. Unitary elastic demand (Ed= 1)
4. Elastic demand (1 < Ed< )
5. Perfectly elastic demand (Ed= ).
PRODUCTION FUNCTION: CONCEPT: - Production is defined as the
transformation of inputs into output.
Production function is the process of getting the
maximum output from a given quantity of inputs in a
particular time period. It is expressed as:
Q=f (X1, X2, X3Xn)
TOTAL PRODUCT: Total quantity of goods
&services produced by the firm with the given inputs
during a specify period of time.
Average Product: It is the amount of output of
produced per unit of the variable factor employed.
Marginal Product: It is the change in the Total
Product resulting from the employment of an
additional unit of a variable factor.

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LAW OF SUPPLY Its states that other things
Return of
a Factor: The Law Of Variable Factor; It
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states that when total output is increased by adding
remaining constant the quantity supplied of a
units of a variable input, while other inputs are held
commodity is directly related to its price.
constant, the increase in the total production
Price Elasticity of Supply
- Es measures
becomes after some point, smaller and smaller.
percentage change in the quantity supplied of a
Return to scale: It states that when all factors of
commodity due to change in its price.
production an increas3d in the same proportion, the
MARKET: Market is a mechanism by which buyer
output will increase but the increase may be at
and seller interact to determine price and quantity of
increasing rate or constant or decreasing rate.
a good or service.
Concept of the cost:-It is the payment made to the
MONOPOLY: In monopoly market there is no close
factors of production, which are used in the
production of that commodity. Time factor is very
substitute to the monopoly product or service
important in the theory of cost.
available in the market.
SHORT RUN COSTS: which are the costs over a
Monopolistic
Competition:
In
monopolistic
period during which some factors are in fixed supply,
competition there are large numbers of buyers and
like Plant, Machinery etc.
sellers. There is free entry and exit of the firms in the
LONG RUN COSTS: Which are the costs over a
long run and there is product differentiation.
period long enough to permit change in all factors of
production.
TOTAL COST=TOTAL FIXED COST+TOTAL
VARIBLE COST.
AVERAGE COST= TOTAL COST/ NO OF UNITS
PRODUCED.
MARGINAL COST=TCn-TCn-1
CONCEPTS OF REVENUE: It is the money receipt
from the sale of commodity.
Types of revenue

Total Revenue: PRICE x QUANTITY

Average Revenue: Per unit of the commodity


sold.

Marginal Revenue.Net addition made to the


total revenue when one more unit of output
sold.
PRODUCERS EQUILIBRIUM
CONCEPTS: A producer is said to be in equilibrium
when he produces the level of output at which his
profits are maximum. Producer equilibrium is where
TR and TC is maximum or where both TR and TC
have the same slope.
Supply is the quantity of the commodity which is
actually offered for sale at a given price during a
period of time. Supply is a part of stock which is
actually brought into the market for sale.

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ECONOMICS
of all taxes levied against their income and their
property by the government.
Final goods are finished goods which are
National Disposable income is the sum total
meant only for final consumption and final
of national income, indirect taxes and net
investment. It is included in estimation of
current transfers from the rest of the world. It is
national income.
the net income at market price available to a
Intermediate goods are goods either used for
country for disposal.
Value added method or Product method or
further production or resale.
Factor payment is made to a factor of
industrial origin method is the difference
production in return for rendering productive
between the total value of output of a firm and
services. Like rent, wages, interest and profits.
value of inputs brought from other firms.
Transfer payments: Payment received without
Value added= Value of output-intermediate
any good or services provided in return. Like
consumption
Precautions: (i)The sale and purchase of
old age pension, scholarships to students etc..
Domestic territory of an economy is wider
second hand goods should not be included in
than the political frontier of a country. It includes
national income.(ii)The value of retained goods
embassies, consulates, military bases of the
for
self-consumption
should
be
government located in other countries.
included.(iii)Imputed value of owner-occupied
Factor income from abroad is income
houses should be included.(iv)Domestic
accruing to the normal residents of a country for
services are not included in national income.
rendering factor services abroad and income
However, production of such services by paid
paid for the factor services rendered by nonemployees will be included.
Under income method, we take the summation
residents in the domestic territory of the
country.
of factor incomes earned by the normal
National income refers to the sum total of
residents of a country in an accounting year.
Precaution: (i)Avoid transfers;(ii)Avoid capital
factor incomes earned by normal residents of a
country during the period of one year.
gains;(iii)Include income from self-consumed
GDPMP : GDP at market prices is the value of all
output;(iv)Do
not
include self-consumed
the final goods and services produced in the
domestic services;(v)Illegal income are not
domestic territory and valued at market price in
included.
Under Expenditure method, national income
a given time period.
GDPFC : GDP at factor cost is the sum total of
measured by taking into account the
factor incomes (viz rent + interest +profit
expenditure undertaken by different sectors on
+wages) generated within the domestic territory
final goods and services in the economy.
Precaution: (i)Expenditure on intermediate
of country including depreciation during a year.
NDPMP : NDP at market price is the market
goods is not included;(ii)Expenditure on
value of the final goods and services produced
second-hand goods in not included;(iii)Avoid
with in the domestic territory of a country.
transfer expenditure;(iv)Net indirect taxes is to
NDPFC : NDP at factor cost is the value of factor
be deducted.
Equilibrium level of income is that level of
incomes received by all factors of production
within the domestic territory in a given time
income where the aggregate demand equals
period. This is also termed as domestic income.
the level of output (aggregate supply) and the
NNPFC : NNP at factor cost is the value of
level of planned savings equals planned
factor incomes received by the residents of an
investment.
The investment multiplier refers to the
economy during an year. It is known as
National Income.
number by which the change in investment is
Private income is the income that accrues to
multiplied to determine the resulting change in
the private sector whatever the source(factor
income.
incomes or transfer income) may be.
i.e. Y =K. I
Personal Disposable income is the income
Deficient demand is a situation which arises
which is left with the individuals after deduction
when planned expenditure is less than the

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planned
supply in the economy. This gives rise
Primary functions: Accepting deposits; Advancing
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to a deflationary gap.
loans
Agency Functions: Collection and making
It may be caused by: (i) Credit contraction, (ii) Cut in
govt. expenditure, (iii) Rise in taxes.
payments for credit instruments;sale and purchase
Excess demand refers to a situation when the
of securities; trustee and executor
planned expenditure in the economy is more
General Utility Functions: Locker facility; Travellers
than the planned supply at full employment
cheques; Collection of statistics; foreign exchange
level. This gives rise to a Inflationary gap.
etc
Credit creation refers to the power of
It may be caused by: (i) Increase in money
supply,(ii) Rise in propensity to consume,(iii)
commercial banks to create credit. With little
Increase in govt. expenditure, (iv) Cut in taxes.
cash in hand, commercial banks can multiply
Fiscal policy is the policy relating to
loans and advances. That is why commercial
government revenue, expenditure and budget.
banks known as factories of credit.
Central bank is an apex institution in the
Its main instrument is: public borrowings, deficit
financing,taxes , public expenditure on public
banking and financial system of a country.
Functions of Central bank: Issues currency
works etc
Monetary policy is the policy adopted by the
notes; acts as banker to the government; acts
central bank to control the availiability of credit
as bankers bank; acts a custodian of foreign
and supply of money in the country. Its main
exchanges reserves of a country; regulates the
instruments is: Bank rate;open market
money supply and volume of credit.
Credit control refers to the regulation of credit
operation;change in cash reserve ratio etc.
Money is what the law says is money. It has
by the central bank for achieving goals like
the legal power to discharged debts and the
price stability, economic growth etc.
Quantitative instruments: Bank rate; open
creditor cannot refuse it in payment of debt.
Money can be classified into three categories:
market operation; cash reserve ratio;
Qualitative instruments: Marginal requirements;
(i)Full bodied money; (ii) Representative money
and (iii)Credit money.
Moral suasion; Direct action

Functions of money: (i) It acts as medium of


Budget is an annual financial statement which
exchange. (ii) Money serves as a measure of
which shows estimated government revenue
value. (iii) Money acts as store of value. (iv)
and expenditure for the coming fiscal year.
Money acts as a standard of deferred
It consists of:
Revenue Budget: It consists Revenue receipts and
payments.
Money supply is composed of two elements:
capital expenditure and
Capital Budget: It consists of Capital Receipts and
Currency with the public and demand deposits
in the banks.
capital expenditure
Revenue deficit refers to situation where in
Measures of Money supply:
M1 = C+DD+OD
government revenue expenditure exceeds its
M2 = M1+ savings deposits with post
office
revenue receipts.
Fiscal Deficit is the excess of total expenditure
savings banks
M3 =M1+Net time deposits of commercial
both the revnue and capital over revenue
banks
receipts and capital receipts excluding
M4 =M3 + Total deposits with post office
borrowings.
Foreign exchange rate refers to the rate at
savings(Excluding National Saving Certificates)
High powered money refers to the total
which one unit of currency of a country can be
monetary liability of the monetary authorities of
exchanged for the number of units of other
the country.
countries currency.
Commercial bank is a financial institution
It can be of two type: Fixed exchange rate and
which accepts deposits from the public and
flexible exchange rate.
Balance of payments of a country is a
gives loans for purposes of consumption and
investment.
systematic record of all economic transactions
Commercial bank functions can be divided into
between the residents of one country and of
three groups:
foreign countries during a given period of time.

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BOP
comprises of two main accounts: i)
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Current account and ii) Capital account.
Balance of trade shows the balance of exports
and imports of visible goods.

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