Consumer's Equilibrium and demand
Consumer’s equilibrium - meaning of utility, marginal utility, law of diminishing marginal utility, conditions of consumer's equilibrium using marginal utility analysis.
Indifference curve analysis of consumer's equilibrium-the consumer's budget (dudget set and dudget line), preferences of the consumer (indifference curve, indifference map) and conditions of consumer's equilibrium.
Demand, market demand, determinants of demand, demand schedule, demand curve and its slope, movement along and shifts in the demand curve; price elasticity of demand - factors affecting price elasticity of demand; measurement of price elasticity of demand - percentage-change method.
Unit 6: Producer Behaviour and Supply
Meaning of Production Function - Short-Run and Long-Run Total Product, Average Product and Marginal Product.
Returns to a Factor
Cost: Short run costs - total cost, total fixed cost, total variable cost; Average cost; Average fixed cost, average variable cost and marginal cost-meaning and their relationships.
Revenue - total, average and marginal revenue - meaning and their relationship.
Supply, market supply, determinants of supply, supply schedule, supply curve and its slope, movements along and shifts in supply curve, price elasticity of supply; measurement of price elasticity of supply - percentage-change method.
Unit 7 : Forms of Market and Price Determination under Perfect Competition with simple applications.
Perfect competition - Features; Determination of market equilibrium and effect of shifts in demand and supply.
Simple Applications of Demand and Supply: Price ceiling, price floor.
Concept :- What is an economy??
You must have observed many activities happening around you in your daily life.. for example, you may have seen factories, mines, shops ,offices, flyovers & railways.. etc.. All this institution and organisation maybe collectively called an economy.
such units helps people to earn an income & also helps to produce goods and services which ultimately require by the people for their use.
Economy is a system which provides people, the means to work and earn a living.
it makes use of the available resources to produce those goods and services that people want.
Like Indian economy consist of all sources of production… whether it is in agriculture, industry, transport and communication & banking etc..
Question So what is the process of an economy to provide living to the people??
Ans:- for this objective to be fulfilled …it is necessary that every economy should undertake three economic activities..
These economic activities are known as essential or the vital processes of an economy.
Concept :- Scarcity
Scarcity refers to the limitation of supply in relation to demand for a commodity.
When wants exceed the available resources.
As a result goods are not readily available and the society does not have enough resources to satisfy all the wants of its people. it is universal that means every individual, organisation and economy faces scarcity of resources. Scarcity of resources give a birth to a term economising of resources economising of resources refers to making optimum use of the available resources. there is a need to economize. as we have to satisfy our unlimited wants out of limited resources.
Oil powers the modern world, running most of the vehicles that connect people and make the global economy function. Everyone loves and wants more oil, even if they pretend like they don’t. But we don’t have an infinite amount of oil. And you can’t just get oil by asking for it. An oil deposit must be discovered by a geologist, and excavated with various methods by an entire team which takes millions of years to regenerate.
Some countries (Saudi Arabia, Venezuela) have absolute loads of oil, while many others have none. Due to which sometimes they control the world’s oil supply for their own benefits.
Just recently, Saudi Arabia and other OPEC countries drastically reduced production to match the reduced demand during the pandemic. This is understandable, but If they’re not happy with the price of oil, they create an artificial scarcity by controlling the rate of production to maintain prices. If they produce too much, prices will fall. & if they reduce production, prices will go up.
In short, scarcity arises when there is a resource that people demand but is not unlimited in nature. Oil is probably the most prominent example of a scarce resource in the modern world.
There are few other examples like:-
So there are lots of examples of Scarcity in the real life you can make it by your own.
But scarcity is not the only problem in addition to being scarce… resources also have alternate uses (different uses)…
alternate uses of resources means that a resource can be put to more than one use.
For example, we all know, petrol is scarce in relation to its demand but there is one more problem in addition to it scarcity …it is used not only vehicles but also in machines ,railway engines, airplanes, generators ,etc …
Whenever a commodity is chosen for one use, other valuable uses will have to be rejected.
it gives rise to the problem of choice
For example, land can be put to alternative uses: you can build factories on it or construct houses. you can grow crops on it or convert it into a playground. After selecting one you have to reject others valuable uses. After that you can’t use the same land for some other useful purpose at the same time.
So what we discussed here is reasons for Economic Problem.
Concept:- Economic Problem.
Economic problem is a problem of choice involving satisfaction of unlimited wants out of limited resources having alternative uses.
As we know human wants are unlimited but the means to satisfy them (resources) are limited therefore all our wants cannot be fulfilled. in order to maximise satisfaction,, every consumer exercises choice… as to which goods should be consumed …and in what quantity ???? so, an economic problem is basically a problem of choice.
Concept:- Reasons for Economic problem
Three main reasons for existence of economic problems are:-
Scarcity of Resources:-
Resources like land, labour & capital etc. are limited in relation to their demand and economy cannot produce all what people want it is the basic reason for the existence of the economic problems in all economies scarcity is universal and applies to all individuals, organisations and countries there would have been no problem if resources were not scarce.
Unlimited human wants:-
Human wants are never ending that means they can never be fully satisfied as soon as one want is satisfied another new want emerges wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources.
Human wants also differ in priorities that means all wants are not of equal intensity for every individual Some wants are more important and urgent as compare to other due to this reason people allocate their resources in order of preference to satisfy some of their wants if all human wants had been of equal importance then it would have Become impossible to make choices.
Human wants tend to be competitive. We have limited means and so we cannot satisfy all of our wants. So they compete with each other. And the most urgent want will be satisfied.
Wants can be complementary as well (Buy One get one free) To satisfy our want for one good we have to make arrangements for another so now we have the want of two goods. For example to run a car you need petrol.
The wants of any person will constantly be changing according to the time and place and situation of the person.
Over the time wants of a person can become his habits or customs.
So, All the desires and aspirations and motives of humans are known as human wants in economics. And the wants that can be satisfied with goods and services of any kind are economic wants. Like for example food, shelter, clothing, etc are economic human wants. And those which cannot be bought are non-economic wants like peace, love, affection, etc.
Concept Classification of human wants
We can classify wants into three broad categories in economics. These are Necessaries, Comforts, and Luxuries. Let us take a look at all three.
1. Necessaries
These are the human wants absolutely essential for living and surviving.
Further necessaries will divide into
(a) necessaries for life,
(b) for efficiency and
(c) finally conventional necessaries.
First and most important wants are obviously necessaries for life. These include food, water, clothing, shelter, etc.
And then there are necessaries that improve our efficiency and well being like comfortable housing, nourishing foods, etc.
Finally, there are conventional necessaries that arise out of habits, customs or conventions.
2. Comforts
These are the extra wants of the human after necessaries.
They are not as essential or urgent as necessaries. Comforts are the wants that make the life of the human comfortable and satisfying.
Generally, these include items that save labour on behalf of the human or provide comfort to him in his life.
So items such as fans, furnished houses, special clothing for occasions, etc fall under this category of human wants.
3. Luxuries
These are goods that give humans pleasure and prestige in society.
They are not needed for existence or comfort but provide happiness and acceptance in the world.
These wants may be called superfluous (i.e. not needed). And such items tend to be expensive.
Some examples of luxuries are cars, diamond jewellery, expensive designer clothing, ACs. As you will notice all these items are not essential to our living. They are items of prestige.
Question: The classification of human wants is rigid. True or False?
Ans: The statement is False. The classification of human wants is not a rigid concept. What is comfort for one person can be a necessity for another. And what is a luxury for one person can be a comfort for another. Many such items that were considered luxuries in the past have now become comforts or even necessities for a few.
Alternate uses:-
As we discussed earlier the example of petrol or land.. Resources are not only scarce but they can also be put to various uses. So choice among the resources is more important.
You may be aware of the word Economics… as you studied economics book as a social science subject in your earlier classes.
So there’s hitting one question in my mind..
Concept
Question Why economics is considered a social science not only science ?
Ans:- The term science stands for any systematic (done by using a fixed method)
and organised body of knowledge (complete set of concepts, terms and activities that make up a professional). economics is also a science as it is a systematic and organised study of economic behaviour of human beings.
However it is not an exact science like physics and chemistry… as it deals with the study of human behaviour therefore it is known as social science.
Concept Meaning of economics
Economics is a social science which studies. the way a society chooses. to use its limited resources.. which have alternative uses. to produce goods and services. and to distribute them among the different groups of people.
Question What is economics’ all about? Economics
Then what will you answer..?
Ans:- economics is all about making choices in the presence of scarcity ..
it studies human behaviour as a relationship between means ( resources ) and ends ( human wants) ..
economics objective is to ensure that the resources are used in the best possible manner…
Concept Types of economics
First we have positive economics and normative economics..
Ultimately, here we proof economics as a science..
Concept Positive Economics
It studies the fact of life that means it deals with things as they are.
what are the economic problems and how are they actually solved.
For example,
(a) India is an over populated country.
(b) prices are constantly rising..
(c) there are inequalities of income in our economy.
Generally positive statements describe what was. what is …or what will be …under the given state of circumstances .. these statements do not pass any value judgements.
For example … a positive economic theory might describe that manufacturing and sale of cigarettes is injurious to health. but it does not provide any instruction or judgement on what policy ought to be followed to avoid cigarettes in an economy.
Economics is not concerned with moral or ethical questions and economist should analyse the things as they are and has no right to give judgement.
Please do not confuse statements of positive economics as statements of truth. They may be true or false.
For example if Ajay says that India is the most populated country in the world and Sneha says that China is the most populated country … then both are positive statements.. however Ajay is wrong and Sneha is right..
That means we can verify the positive statements as true or false by comparing with the actual data.
Concept Normative economics
It tells us what ought to be..
it deals with what ought to be or how the economic problems should be solved.
For example…
India should not be an over populated country.
Prices should not rise.
Income inequalities should be reduced.
That means it discuss what are desirable things and should be realise and what are undesirable things and should be avoided that means it gives decisions regarding value judgements.
Concept
Next we have microeconomics and macroeconomics.
These are the two main branches of economics. One deals with price theory (which states that the price for any specific good or service is based on the relationship between its supply and demand. and other deals with income & employment theory. Which concerned with the relative levels of output, employment, and prices in an economy.) let’s discuss in detail.
Concept Microeconomics
The term micro has been derived from greek word “mikros” which means “small” it deals with analysis (examine krna) of behaviour and economic actions of small and individual units of the economy like a particular consumer,, a firm,, or a small group of individual units..
It is that part of economic theory which studies the behaviour of individual units of an economy for example individual income,, individual output,,, price of a commodity etc. its main tools are demand and supply.
Concept Macroeconomics
The term macro has been derived from the greek word “makros” which means “large”. It deals with overall performance of the economy. it study the problems of economy like inflation, unemployment, poverty etc..
It is that part of economic theory which studies the behaviour of aggregates of economy as a whole. for example national income, aggregate output, aggregate consumption etc.
Its main tools are aggregate demand and aggregate supply. If you focused on the word Micro & Macro there’s just a difference of one letter that is I & A and the I stands for individuals which studies the economic behaviour of individuals and the A stands for aggregates which means the studies of economy as a whole.
If you ask an economist. Sir did we need to study two separate economics. They will tell you No. Because economics is a single subject and the analysis of an economy cannot be split into two compartments. it means microeconomics and macroeconomics are interdependent as there is much common ground between the two.
For example
price of a commodity is influenced by the general price level prevailing in the economy Here, Micro depends on macro. National income of a country is nothing but the sum total of incomes of individual units of the country Here, Macro depends on micro Aggregate demand depends on demand of individual households of the economy... Here, macro depends on micro..
Concept Central problems of an economy
these all Cover the basic economic activities of life.
And every society has to face scarcity of resources…
And because of this scarcity, every society has to decide how to allocate the limited/ scarce resources. it leads to following central problems.
1st :- what to produce
2nd :- how to produce
3rd:- for whom to produce
These problems are called central problems Of an economy because these are the most basic problems of an economy and all others problems revolve around them.
Concept
Question:-Now what is allocation of Resources??
Allocation of resources refers to the problem of assigning the scarce resources in such a manner so that maximum wants of the society are fulfilled.
Concept
What to produce?
This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity.
For example production of more war goods (like guns, tanks etc) is possible only by reducing the production of civil goods.. (like bread, butter etc..)
On the bases of the importance of various goods an economy has to decide which goods should be produced and in what quantities this is a problem of allocation of resources among different goods.
What possible commodities to produce??
An economy has to decide which consumer goods (like rice, wheat, clothes, etc) and which of the capital goods( like machinery, equipment’s ,etc..) to be produced …
In the same way economy has to make a choice between civil goods (like bread, butter, etc) and war goods (like guns, tanks, etc).
After deciding the goods to be produced economy has to decide the quantity of each commodity that is selected. it means, it involves a decision regarding the quantity to be produced of consumer goods and capital goods… civil goods and war goods. and so on..
Question and how will we solve this problem??
By selecting those goods and services and number of quantities thereon which gives maximum aggregate satisfaction.
Concept
How to produce??
This problem refers to selection of technique to be used for production of goods and services.
Generally techniques are classified as labour-intensive techniques (LIT) and capital intensive techniques (CIT)
In labour intensive technique more labour and less capital (like machines) is used.
In capital intensive technique there is more capital and less labour utilisation.
For example textiles can be produced either with a lot of labour and a little capital Or with less labour and more capital.
Question And how will you make a choice for a type of technique to be used..??
Availability of factors or latest prices will help you to determine the technique to be used plus. Selection is made with a view to achieve the objective of raising the standard of living of people and provide employment to everyone.
For example: in India, LIT is preferred due to abundance of labour whereas, countries like USA, England, etc. prefer CIT. due to shortage of labour and abundance of capital.
Question how will we solve this problem (how to produce)..??
By combining factors of production (land, labour, capital) in such a manner so that maximum output is produced at minimum cost using least possible scarce resources.
Concept
For whom to produce..??
This problem relates to the distribution of produced goods and services among the individuals within the economy. That means selection of the category of people who will ultimately consume the goods
In other terms whether to produce goods for more poor and less rich or more rich and less poor.
Personal Distribution
It means how national income of an economy is distributed among different groups of people.
Functional Distribution
It involves deciding the share of different factors of production in the total national product of the country.
Question how will we solve this problem ( For whom to produce..)??
By ensuring that urgent wants of each productive sector are fulfilled to the maximum possible extent done..?
Concept
Opportunity Cost:-
Opportunity cost is the cost of next best alternative foregone.
Suppose you are working in a bank at the salary of 50,000 per month. Further suppose you receive two more job offers. One is to work as an executive at Rs.35,000 per month or the other one is to become a journalist at Rs.40,000 per month.
So opportunity cost of working in the bank is… the cost of next best alternative foregone that is Rs.40,000..
Suppose you have Rs.30,000 and you want to purchase one laptop and LEDTV. with 30,000 only in hand you cannot have both you can either buy a laptop or LEDTV. if you decide to purchase laptop then opportunity cost of choosing the laptop is the cost of forgone satisfaction from LED Tv so our resources are limited and we are always forced to make choices between alternative commodities.
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