m Economics is the study of how people choose to use resources.

m Pesources include the time and talent people have available, the
land, buildings, equipment, and other tools on hand, and the
knowledge of how to combine them to create useful products and
services.
m Important choices involve how much time to devote to work, to
school, and to leisure, how many dollars to spend and how many to
save, how to combine resources to produce goods and services, and
how to vote and shape the level of taxes and the role of government.
m Often, people appear to use their resources to improve their well-
being. Well-being includes the satisfaction people gain from the
products and services they choose to consume, from their time spent
in leisure and with family and community as well as in jobs, and the
security and services provided by effective governments. Sometimes,
however, people appear to use their resources in ways that don't
improve their well-being.
m In short, economics includes the study of labor, land, and
investments, of money, income, and production, and of taxes and
government expenditures. Economists seek to measure well-
being, to learn how well-being may increase overtime, and to
evaluate the well-being of the rich and the poor.
m ×he most famous book in economics is the Inquiry into the Nature
and Causes of The Wealth of Nations written by Adam Smith, and
published in 1776 in Scotland.
m ×he term Dzwealthdz has a special meaning in Economics. In the
ordinary language, by Dzwealthdz, we mean money, but in
economics, wealth refers to those goods which satisfy human
wants. ½ut we should remember all goods which satisfy human
wants are not wealth. For example, air and sunlight are essential
for us. We cannot live without them. ½ut they are not regarded as
wealth because they are available in abundance and unlimited in
supply. We consider only those goods which are relatively scarce
and have money value as wealth.
m VEconomics is the study of people in the ordinary
business of life.dz-- Alfred Marshall, ërinciples of
economics; an introductory volume  ondon:
Macmillan, 1890)

m VEconomics is the science which studies human

behaviour as a relationship between given ends and
scarce means which have alternative uses.dz-- ionel
Pobbins, 3n Essay on the Nature and Significance of
Economic Science  ondon: MacMillan, 1932)

m Economics is the Vstudy of how societies use scarce

resources to produce valuable commodities and
distribute them among different people.dz-- Paul A.
Samuelson, Economics 
ew York: McGraw-Hill, 1948)
m Economics is studying how people choose to spend their
limited incomes on unlimited wants.
m Economics is about the world around us, how people spend
their money to benefit themselves. However, its complicated
and makes life very difficult for us.
m Economics is about the economy and how it works. It seems to
be purely about efficiency.
m Economics is about the relationship between producers &
consumers and the way in which the forces of supply & demand
affect prices & products in the economy.
m Economics is the study of how a country runs globally and
within itself. How we use our limited resources  in our country
& globally ) to satisfy the infinite wants of people living within
the country.
m Economics is the rotation, management and analysis of
money.
m Economics deals with the processors involved in balancing the
limited resources in society and the unlimited wants of the
consumers.
m Economics is the study of choice. It concerns the worldwide
problem of scarcity. We all have unlimited wants & limited resources
& have to choose hence economics.
m Economics is all about drawing graphs, staying awake &
attending lecturesî ×his is essential.
m Economics is relevant and interesting Ȃ much more so than
maths and accounting. It can easily be applied and related to the
world around us.
m Economics is about understanding how the markets of the world
works. It is interesting to learn about how consumers & producers
affect each other.
m Economics has taught that every decision in life has an
opportunity cost.
m According to economics, the glass is half empty  scarcity ).
m Economics does require a brainî Donǯt be fooled.
m Economics is an interesting social science that is relevant to
our everyday lives. As you start learning more about it, you will
realise how it does apply to our lives.
m Economics is awesome because of the deeper understanding
it helps us to reach the way we function in our daily lives.
m Economics is about discovering new things, understanding
them and challenging those we believe in as a global
economy.
m Economics is everywhere.
m Economics is a way of looking at how societies organise
m And finally, If your demand for the best quality
education is inelastic, Karunya has the supply.
Make the right decision.
m Microeconomics is the study of a section of the economy rather than
the economy as a whole macroeconomics).
m Microeconomics is more concerned with the allocation of scarce
resources and the elasticity econ. word for sensitivity)of consumers
and producers at the level of households and firms.
m VMicroeconomics deals with the decision making and market results
of consumers and firmsV.
m ×he Economist's ‰ictionary of Economics defines Microeconomics
as V×he study of economics at the level of individual consumers,
groups of consumers, or firms... ×he general concern of
microeconomics is the efficient allocation of scarce resources
between alternative uses but more specifically it involves the
determination of price through the optimizing behaviour of
economic agents, with consumers maximizing utility and firms
maximizing profit.Dz
m Vthe analysis of the decisions made by individuals and groups, the
factors that affect those decisions, and how those decisions effect
othersV.
Macro and microeconomics are the two vantage points from which
the economy is observed.
m Macroeconomics looks at the total output of a nation and the way
the nation allocates its limited resources of land, labor and
capital in an attempt to maximize production levels and promote
trade and growth for future generations. After observing the
society as a whole, Adam Smith noted that there was an
Vinvisible handV turning the wheels of the economy: a market
force that keeps the economy functioning.
m Microeconomics looks into similar issues, but on the level of the
individual people and firms within the economy. It tends to be
more scientific in its approach, and studies the parts that make
up the whole economy. Analyzing certain aspects of human
behavior, microeconomics shows us how individuals and firms
respond to changes in price and why they demand what they do
at particular price levels.
m Micro and macroeconomics are intertwined; as economists
gain understanding of certain phenomena, they can help
nations and individuals make more informed decisions when
allocating resources.
m ×he systems by which nations allocate their resources can be
placed on a spectrum where the command economy is on the
one end and the market economy is on the other.
m ×he market economy advocates forces within a competitive
market, which constitute the Vinvisible handV, to determine
how resources should be allocated. ×he command economic
system relies on the government to decide how the country's
resources would best be allocated.
m In both systems, however, scarcity and unlimited wants force
governments and individuals to decide how best to manage
resources and allocate them in the most efficient way
possible.
evertheless, there are always limits to what the
economy and government can do.
m Market who, what, how)
m Supply and demand is an economic model
m Designed to explain how prices are determined in
certain types of markets
m What you will learn in this chapter
m How the model of supply and demand works and
how to use it
1. ×he law of demand
2. ×he law of supply
3. ×he determination of market equilibrium
4. Factors shifting demand or supply curves

JJ
m In economics, a market is not a place but rather a
group of buyers and sellers with the potential to
trade with each other
m Market is defined not by its location but by its
participants
m First step in an economic analysis is to define and
characterize the market or collection of markets to
analyze
m Economists think of the economy as a collection of
individual markets

J
m Defining the market often requires economists to
group things together
m Aggregation is the combining of a group of distinct
things into a single whole
m Markets can be defined broadly or narrowly,
depending on our purpose
m How broadly or narrowly markets are defined is one of
the most important differences between
Macroeconomics and Microeconomics

J

m Goods and services are aggregated to the highest levels
m Macro models lump all consumer goods into the single
category üconsumption goods
m Macro models will also analyze all capital goods as one
market
m Macroeconomists take an overall view of the economy
without getting bogged down in details

J
m Markets are defined narrowly
m Focus on models that define much more specific
commodities
m Always involves some aggregation
m ½ut stops it reaches the highest level of generality that
macroeconomics investigates

J
m ½uyers and sellers in a market can be
m Households
m ½usiness firms
m Government agencies
m All three can be both buyers and sellers in the same market,
but are not always
m For purposes of simplification this text will
usually follow these guidelines
m In markets for consumer goods, we*ll view business
firms as the only sellers, and households as only
buyers
m In most of our discussions, we*ll be leaving out the
ümiddleman
J
m In imperfectly competitive markets, individual buyers or sellers
can influence the price of the product
m In perfectly competitive markets or just competitive markets),
each buyer and seller takes the market price as a given
m What makes some markets imperfectly competitive and others
perfectly competitive?
m Perfectly competitive markets have many small buyers and
sellers
m Each is a small part of the market, and the product is
standardized
m Imperfectly competitive markets have just a few large buyers
and sellers
m Or else the product of each seller is unique in some way

J
m Supply and demand model is designed to explain
how prices are determined in perfectly competitive
markets
m Perfect competition is rare but many markets come
reasonably close
m Perfect competition is a matter of degree rather than an
all or nothing characteristic

m Supply and demand is one of the most versatile

and widely used models in the economist*s tool kit

J
m Demand is: the willingness and ability of buyers to
purchase different quantities of a good at different
prices during a specific period of time.

m ×he aw of Demand: as the price of a good rises,

quantity demanded of that good falls; as the price of a
good falls, quantity demanded of that good rises.
m A household*s quantity demanded of a good
m Specific amount household would choose to buy over
some time period, given
m A particular price that must be paid for the good
m All other constraints on the household

X Market quantity demanded or quantity

demanded) is the specific amount of a good that
all buyers in the market would choose to buy over
some time period, given
m A particular price they must pay for the good
m All other constraints on households


m Implies a choice
m How much households would like to buy when they take into
account the opportunity cost of their decisions?
m Is hypothetical
m Makes no assumptions about availability of the good
m How much would households want to buy, at a specific price, given
real-world limits on their spending power?
m Stresses price
m Price of the good is one variable among many that influences
quantity demanded
m We*ll assume that all other influences on demand are held constant,
so we can explore the relationship between price and quantity
demanded

J
m ×he price of a good rises and everything else remains the
same, the quantity of the good demanded will fall
m ×he words, üeverything else remains the same are
important
m In the real world many variables change
simultaneously
m However, in order to understand the economy we
must first understand each variable separately
m ×hus we assume that, üeverything else remains the
same, in order to understand how demand reacts to
price
m Demand schedule
m A list showing the quantity of a good that consumers
would choose to purchase at different prices, with all
other variables held constant
m Demand V.S. Quantities demanded
- demand is the entire relationship between price
and quantity
- quantities demanded are specific amount of
goods buyers want to buy

m ×he market demand curve or just demand curve)
shows the relationship between the price of a good and
the quantity demanded , holding constant all other
variables that influence demand
m Each point on the curve shows the total buyers would
choose to buy at a specific price
m aw of demand tells us that demand curves virtually
always slope downward


 




 
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m Move along the demand curve
m From a change in the price of the good we analyze
m In maple syrup example, Figure 1
m A fall in price would cause a movement to the right along the
demand curve point A to ½)



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m Shift of demand curve
m a change in other things than price of the good causes a
shift in the demand curve itself, for example, income
m In Figure 2
m Demand curve has shifted to the right of the old curve
from Figure 1) as income has risen
m A change in any variable that affects demandùexcept for
the good*s priceùcauses the demand curve to shift


 


 

 




 
 
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m anguage is important when discussing demand
m üQuantity demanded means
m A particular amount that buyers would choose to buy
at a specific price
m It is a number represented by a single point on a
demand curve
m When a change in the price of a good moves us along
a demand curve, it is a change in quantity demand
m ×he term demand means
m ×he entire relationship between price and quantity
demandedùand represented by the entire demand
curve
m When something other than price changes, causing
the entire demand curve to shift, it is a change in

demand
m An increase in income has effect of shifting demand
for normal goods to the right
m However, a rise in income shifts demand for inferior
goods to the left
m A rise in income will increase the demand for a normal
good, and decrease the demand for an inferior good
m
ormal good and inferior good are defined by the
relation between demand and income

J
m Your wealthùat any point in timeùis the total value
of everything you own minus the total dollar amount
you owe
- Example
m An increase in wealth will
m Increase demand shift the curve rightward) for a
normal good
m Decrease demand shift the curve leftward) for an
inferior good

m Substituteùgood that can be used in place of
some other good and that fulfills more or less the
same purpose
m Example
m A rise in the price of a substitute increases the demand
for a good, shifting the demand curve to the right
m Complementùused together with the good we are
interested in
m Example
m A rise in the price of a complement decreases the
demand for a good, shifting the demand curve to the left

m Population
m As the population increases in an area
m
umber of buyers will ordinarily increase
m Demand for a good will increase
m Expected Price
m An expectation that price will rise fall) in the future shifts the
current demand curve rightward leftward)
m ×astes
m Combination of all the personal factors that go into
determining how a buyer feels about a good
m When tastes change toward a good, demand increases, and
the demand curve shifts to the right
m When tastes change away from a good, demand decreases,
and the demand curve shifts to the left


m Income depends on good*s nature: normal or inferior)

m Wealth depends on good*s nature)

m ërices of substitutes positively related)
m ërices of complements negatively related)
m ëopulation positively related)
m Expected price positively related)
m Tastes positively related)



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m Supply is the willingness and ability of sellers to
produce and offer to sell different quantities of a
good at different prices during a specific period of
time
m aw of Supply: As the price of a good rises, the
quantity supplied of the good rises; and as the price
of a good falls, the quantity supplied of the good
falls.


m A firm*s quantity supplied of a good is the specific
amount its managers would choose to sell over
some time period, given
m A particular price for the good
m All other constraints on the firm
X Market quantity supplied or quantity supplied) is
the specific amount of a good that all sellers in the
market would choose to sell over some time period,
given
m A particular price for the good
m All other constraints on firms


m Implies a choice
m Quantity that gives firms the highest possible profits when they
take account of the constraints presented to them by the real world
m Is hypothetical
m Does not make assumptions about firms* ability to sell the good
m How much would firms* managers want to sell, given the price of
the good and all other constraints they must consider?
m Stresses price
m ×he price of the good is just one variable among many that
influences quantity supplied
m We*ll assume that all other influences on supply are held constant,
so we can explore the relationship between price and quantity
supplied


m States that when the price of a good rises and
everything else remains the same, the quantity of the
good supplied will rise
m ×he words, üeverything else remains the same are
important
m In the real world many variables change simultaneously
m However, in order to understand the economy we must first
understand each variable separately
m We assume üeverything else remains the same in order to
understand how supply reacts to price

J
m Supply scheduleùshows quantities of a good or
service firms would choose to produce and sell at
different prices, with all other variables held constant
m Supply curveùgraphical depiction of a supply
schedule
m Shows quantity of a good or service supplied at various
prices, with all other variables held constant


  

 
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m A change in the price of a good causes a movement
along the supply curve
m In Figure 4
m A rise fall) in price would cause a rightward leftward)
movement along the supply curve
m A drop in transportation costs will cause a shift in
the supply curve itself
m In Figure 5
m Supply curve has shifted to the right of the old curve from
Figure 4) as transportation costs have dropped
m A change in any variable that affects supplyùexcept for the
good*s priceùcauses the supply curve to shift


  


  


  
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m Input prices
m A fall rise) in the price of an input causes an
increase decrease) in supply, shifting the supply
curve to the right left)
m Price of Pelated Goods
m When the price of an alternate good rises falls), the
supply curve for the good in question shifts leftward
rightward)
m ×echnology
m Cost-saving technological advances increase the
supply of a good, shifting the supply curve to the
right

m
umber of Firms
m An increase decrease) in the number of sellersùwith
no other changesùshifts the supply curve to the right
left)
m Expected Price
m An expectation of a future price increase decrease)
shifts the current supply curve to the left right)


m Changes in weather
m Favorable weather
m Increases crop yields
m Causes a rightward shift of the supply curve for that crop
m Unfavorable weather
m Destroys crops
m Shrinks yields
m Shifts the supply curve leftward

m Other unfavorable natural events may effect all

firms in an area
m Causing a leftward shift in the supply curve


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m ×he short list of shift-variables for supply that we
have discussed is far from exhaustive
m In some cases, even the threat of such events can
cause serious effects on production
m ½asic principle is always the same
m Anything that makes sellers want to sell more or less of a
good at any given price will shift supply curve


m When a market is in equilibrium
m ½oth price of good and quantity bought and sold have
settled into a state of rest
m ×he equilibrium price and equilibrium quantity are
values for price and quantity in the market but, once
achieved, will remain constant
m Unless and until supply curve or demand curve shifts
m ×he equilibrium price and equilibrium quantity
can be found on the vertical and horizontal axes,
respectively
m At point where supply and demand curves cross



   


 
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m Excess demand
m At a given price, the excess of quantity demanded over
quantity supplied
m Price of the good will rise as buyers compete with each
other to get more of the good than is available


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m Excess Supply
m At a given price, the excess of quantity supplied over
quantity demanded
m Price of the good will fall as sellers compete with each
other to sell more of the good than buyers want


m Income rises, causing an increase in demand
m Pightward shift in the demand curve causes rightward
movement along the supply curve
m Equilibrium price and equilibrium quantity both rise
m Shift of one curve causes a movement along the other
curve to new equilibrium point



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m An ice storm causes a decrease in supply
m Weather is a shift variable for supply curve
m Any change that shifts the supply curve leftward in a market
will increase the equilibrium price
m And decrease the equilibrium quantity in that market


 


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m Why did Iraq*s invasion of Kuwait cause the price of oil
to rise?
m Immediately after the invasion, United States led a
worldwide embargo on oil from both Iraq and Kuwait
m A significant decrease in the oil industry*s productive
capacity caused a shift in the supply curve to the left
m Price of oil increased


  
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m Why did the price of natural gas rise as well?
m Oil is a substitute for natural gas
m Pise in the price of a substitute increases demand for a
good
m Pise in price of oil caused demand curve for natural gas
to shift to the right
m ×hus, the price of natural gas rose


  



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m When just one curve shifts and we know the
direction of the shift) we can determine the
direction that both equilibrium price and quantity
will move
m When both curves shift and we know the
direction of the shifts) we can determine the
direction for either price or quantityùbut not both
m Direction of the other will depend on which curve shifts
by more


m Key Step 1ùCharacterize the Market
m Decide which market or markets best suit problem
being analyzed and identify decision makers buyers
and sellers) who interact there
m Key Step 2ùFind the Equilibrium
m Describe conditions necessary for equilibrium in the
market, and a method for determining that equilibrium
m Key Step 3ùWhat Happens When ×hings Change
m Explore how events or government polices change
market equilibrium


m Example: problem 4, 
 
 
 

"
  
   
chapter 3 in textbook.
m Demand & Supply 
 J
Diagram
m Equilibrium P & Q J  J

m Why $1000 can not be J  J

equilibrium?
m Effects from a tornado J J J
destroying some
J J J
apartments.
J J


m ×hrough the study of the chapter, you will be able to
m Characterize a market.
m Use a demand schedule and a demand curve to demonstrate the
law of demand.
m Explain the difference between a change in demand shift of the
curve) and a change in quantity demanded movement along the
curve).
m ist the factors that will lead to a change in demand, and give
examples of each.
m Similar analysis for supply side.
m Explain how equilibrium price and quantity are determined in a
competitive market.
m Explain what will happen in a competitive market after a shift in
the supply curve, the demand curve, or both.
m Describe the three steps economists take to answer almost any
question about the economy.

J

 m Price elasticity of demand: the percentage change in
the quantity demanded that results from a 1 percent
change in the price

  
 

J ë ëJ



> J ë > ëJ



1. Perfectly inelastic demand: ep l 0
2. Inelastic demand: ep < 1
3. Unit elastic demand: ep l 1
4. Elastic demand: ep > 1
5. Perfectly elastic demand: ep l infinity


1. Availability of close substitutes
m Greater availability implies more elastic
2. uxuries vs. necessities
m uxuries are more elastic
3. ½udget share
m Greater share implies more elastic
4. ×ime horizon
m onger horizon implies more elastic
5. Definition of the market
m
arrower definition implies more elastic


Determinants of Price Elasticity of Demand:

1. Substitutability
More substitutable † more elastic
Less substitutable † less elastic
2. Proportion of Income
Greater proportion of income † more elastic
Lesser proportion of income † less elastic
Examples: Autos vs. Salt
3. Luxuriousness
More luxurious † more elastic
Less luxurious † less elastic
Examples: Cruise vs. Surgery
4. Time (More time † greater elasticity, vice versa.)
m ×otal revenue: TR = ë x Q

m If ep < 1, then an increase decrease) in ë will increase

decrease) TR

m If ep l 1, then a change in ë will not change TR

m If ep > 1, then an increase decrease) in ë will decrease

increase) TR


m Income elasticity of demand: percentage change in
quantity demanded given a 1 percent change in income

 š  
" 

   

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J  J



> J  > J

m Cross price elasticity of demand: percentage change in
quantity demanded of good 3 given a 1 percent change in
the price of good B

 š    

    


 J ½ J½




 > J  ½ > J½


m Elasticity of supply: the percentage change in the
quantity supplied that results from a 1 percent change
in the price

m Calculate es using the same midpoint formula that we

used for ep


1. Perfectly inelastic supply: es l 0
2. Inelastic supply: es < 1
3. Unit elastic supply: es l 1
4. Elastic supply: es > 1
5. Perfectly elastic supply: es l infinity

J
1. Feasibility of production
m More feasible implies more elastic

2. ×ime horizon
m onger horizon implies more elastic