Micro And Macro Economics

MICRO AND MACRO ECONOMICS 1. When we are analyzing the problems of the economy as a whole it is macroeconomics. 2. While analysis of of the behavior of particular decision making unit such as a house, or a firm, constitutes micro-economics

FACTORS OF PRODUCTION 1. Ultimate aim of all production is consumption. 2. Producer exchanges product for other products (eg money) 3. Factors of production (or resources) are Land, Labor, Capital and Enterprise

Land 1. It refers not only to area, but also to natural resouces 2. Materials and forces which nature provides 3. Is scarce (has alternate uses)

Labor 1. 2. 3. 4.

Any work undertaken for monetary considerations. Human time consumed in doing physical and mental work

Capital 1. Part of wealth that can be made to produce further wealth or yeilds income 2. Like plant, macinery, tools, raw materials, fuel

Enterprise 1. It coordinates and corelates other factors of production. 2. Orginization, Supervision 3. Taking risks and earning profits as a result

ECONOMIC SYSTEMS 1. Market is the place at which buyers and seller negotiate. 2. it can be around the globe thru internet or 3. it can be at local level round the corner shop

Perfect Economy 1. Price is set by demand and supply formulation

Planned Economy 1. Govt plans what and how much should be used, what should be paid

Mixed Economy 1. Certain features (military, police, telecom) are held by govt. others are free.

MICRO-ECONOMICS

H1: DEMAND AND SUPPLY

DEMAND 1. Demand is an effective desire, a desire which is backed by willingnewss and abality to pay a commodity in order to pay for it. 2. Demand means various quantities of goods that would be purchased per time period at different prices in a given market.

LAW OF DEMAND 1. The quantity of demand increases with every fall in price and devreses with every rise in price; ceteris paribus. 2. Demand is inversely propotional to price

SUPPLY 1. It is the amount of a commodity that seller are willing to sell at a certain price over the time. 2. Stock on the other hand is something that can be sold but waiting for right time/price.

LAW OF SUPPLY 1. Assuming ceteris paribus, sellers are willing to supply more goods at higher price than at lower price. 2. Demand is directly propotional to price

H1: UTILITY ANALYSIS OF DEMAND 1. Marginal Utility means increment in satisfaction attained from consuming another unit of commodity after already consuming one or more unit of the commodity.

ASSUMPTIONS OF MARGINAL UTILITY ANALYSIS

Cardinal Measure Of Utility 1. According to this law, statisfaction derived from a commodity/service consumed can be exactly measured, and it can be assigned a specific amount/ number that it gave satisfaction.

Independent Utilities 1. It assumes that utility derived from one commodity does not affect utility derived from another commodity

Constant Marginal Utility Of Money 1. Utility of money does not decrease with increment in stock of money

H3 Introspection 1. Behavior of a person can be taken as an inference of general public, meaning that one person's behavior predicts similar behavior of other people

LAW OF DIMINISHING MARGINAL UTILITY 1. It says that when a person has consumed a unit of a commodity, marginal staisfaction he gets from additional units tends to be lower, ceteris paribus. 2. For example, eating an apple gives utility of 20, eating another after first will give utility less than 20 of the second, assuming it 18. Therefore, total utility deriven from eating 2 apples is 38. 3. the marginal utilities will get lower and lower untill they get negative.

Limitations Of Law Of Diminishing Utility 1. 2. 3. 4. 5.

Consumption should be within suitable time for this law to be effective Consumption should be of suitable units of commodity Constant Tastes and Fashion Constant Consumer's Income It is not applicable to extraordinay goods like antique painting, or stamps for stamp collector, increment in this case increases utility 6. Money 7. Consumer should be rational, normal person without unsual interests, habbits

LAW OF EQUI-MARGINAL UTILITY 1. This law states that when rational consumer maximizes his utility from several commodities he consumed, he has actually equilized marginal utility of each commodity 2. When marginal utilities of more than one commodities are equalized, they are in such a order that we get maximum utility from that combination. 3. When MU(x)/P(x) = MU(y)/P(y); satisfaction is max. Marginal utility of money is constant 4. If a person has a good that has several uses, he will distribute it among those uses in such a way that is has same marginal utility in all.

Limitations Of Law Of Equi-Marginal Utility 1. Requires careful calculations of utilities and their comparation 2. Constant Tastes and fashions 3. All goods are not infinetly divisible. cow cannot be divided into parts to equalize utility ===============================================================

MRS 1. MRS of X for Y = Price(X)/Price(Y)

Budget Line 1. A Budget constraint represents the combinations of goods and services that a consumer can purchase given current prices and his income. 2. an income limitation on a person’s expenditure on goods and services 3. It convey consumer's potential to consume, which is limited by market price and limited income

Consumer's Equilibrium 1. In order to arrive at equilibrium, we need to combine the preference world with the budget world. 2. That is, we need a graph that has both indifference curves and a budget constraint on the same picture. See, our task is simple. 3. Consumer's Equlibrium lies at the point where budget line is tangent to an indifference curve. 4. The one farthest indifference curve from the origin is clearly a very attractive curve. But, it is not affordable by this consumer.

Price And Income Changes 1. If price of a good has risen more then those of other goods and incomes generelly, then a real price rise has occurred. 2. If price of a good X rises MU(X)/P(X) will fall, destablizing the equibilirum. To restore previous level of utility he will have to decrease amount of good X he consumes and increase the amount of good Y. 3. If price of a commodity rises, demand by every rational consumer for that good will fall 4. If price of a commodity falls, demand by every rational consumer for that good will rise

Income Effect 1. Income of a consumer is a major factor affecting the purchase of commodities 2. The effect on the purchase due to change in income is called income effect when price of goods are constant 3. Rise in income will shift budget line away from origin, and higher indifference curve will be attained

Price Effect 1. If price of a good falls and income remains same, consumer will be able to consume more amount of aggregate goods. 2. Following a price fall, there are two effects on the consumer, the Substitution Effect and the Income effect. Together they are referred to as the price effect 3. It compromises of two parts, first called Income effect and second Subsitute effect 4. According to income effect, if price of a good lowers or income increases, consumer will be able to consume more amount of all goods 5. Subsitute effect says when ???????????????????????????????????????????????????????????????????????????

H1: MARKET AND MARKET STRUCTURE

ECONOMIC SYSTEMS 1. An economic system is loosely defined as country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world. 2. Three types of economic systems exist, each with their own drawbacks and benefits; the Market Economy, the Planned Economy and the Mixed Economy.

Market Economy 1. In a market economy, national and state governments play a minor role. 2. Instead, consumers and their buying decisions drive the economy. 3. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development. 4. Market decisions are mainly dominated by supply and demand.

Planned Economy 1. A planned economy is also sometimes called a command economy. 2. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. 3. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. 4. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing.

Mixed Economy 1. A mixed economy combines elements of both the planned and the market economies in one cohesive system. 2. This means that certain features from both market and planned economic systems are taken to form this type of economy. 3. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country – both sectors play an important role in the economic decision-making of the country. 4. Govt. control sectors which are less profiting and vitals for the social systems like Courts, Police, Army.

MARKET AND ITS STRUCTURE

Market 1. In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) commodities. 2. The world of commercial activity where goods and services are bought and sold

Market Structure 1. In economics, market structure (also known as market form) describes the state of a market with respect to competition. 2. The way that suppliers and demanders in an industry interact to determine price and quantity 3. According to competition market can be classified into Perfect Competitive Market, Monopoly, Monopolistic competition and Oligopoly

Perfect Competition 1. 2. 3. 4.

Large number of buyers and sellers Price is set by demand and supply flow Price cannot be influenced by a firm No limitations in the market

Monopoly 1. Opposite of perfect competition 2. There is only one firm producing that commodity 3. That firm can charge any amount of price for its product

Monopolistic Competition 1. The form of imperfect competition in which the market has sufficiently few firms that each one faces a downward-sloping demand curve, but enough that each can ignore the reactions of rivals to what it does 2. A type of competition within an industry where: ◦ All firms produce similar yet not perfectly substitutable products. ◦ All firms are able to enter the industry if the profits are attractive. ◦ All firms are profit maximizers. ◦ All firms have some market power, which means none are price takers. 3. a

Oligopoly 1. A market dominated by so few sellers that action by any of them will impact both the price of the good and the competitors. 2. A market structure in which there are a small number of sellers, at least some of whose individual decisions about price or quantity matter to the others. 3. Each seller control substantial part of the market