Economics is the study of how scarce resources are allocated to produce goods and services which
will satisfy unlimited wants.
Three questions-
1. What goods & services get produced?
2. How they get produced?
3. Who gets the goods & services
Every choice involves a tradeoff- giving up one thing to get something else- study vs work,
spend vs save, defense vs healthcare spending.
Rational self-interest: all trade-offs are made to increase utility. We all have rational self-interest
(people are rational in nature)
Microeconomics- is the study of choices made by individuals and businesses, the way these choices
interact in markets, and the influence of governments.
1. Unlimited Needs
2. Unlimited wants
3. Scarcity of resources
4. Choice
Markets are institutions or arrangements that enable us to buy & sell- Products, buyers, sellers,
voluntary exchange.
An important tradeoff in economics is between efficiency and equity.
Economics involve trade-off between efficiency and equity
Efficiency: to produce maximum goods & services at the lowest cost.
Equity: Fair share of goods & services must be distributed
Factors of production in economics-
1. Land
2. Labour
3. Capital
4. Entrepreneurship
• Principle#1: OPPORTUNITY COST: (Choices involve cost of next best alternative forgone)
• Scarcity leads to trade-offs give-up/sacrifice something to
get another
• emphasises that every choice involves a cost — the cost of the alternative that was
foregone.
• Principle#2: MARGINAL PRINCIPLE (Think at the margin):
Marginal benefit: additional benefit from a small change in an activity.
, Marginal cost: additional cost from a small change in an activity.
“ It states that to increase the level of an activity as long as MB>MC. Choose
the level where MB=MC”.
• Assumptions to simplify: to simplify the argument: buying a packet of potato chips, costs $2.
An another packet available for 80 cents extra.
• Principle#3: PRINCIPLE OF DIMINISHING RETURNS:
Assume two inputs (land and capital, i.e., farm & tractor)
“ As more units of variable factor (tractor) are added to fixed factor (farm) then after
a point the extra (or marginal) output, from additional units, will decline”
Principle#4: Principle of Diminishing marginal utility
opportunity cost
Principle- Marginal principal
Marginal benefit- additional benefit occurred by a small change.
Principle- of Diminishing Returns (as we put on more costs, the percentage of returns start to
decrease after a certain point of time)
Ceteris Paribus- All other things being equal.
Demand- Lecture 2
Market is the place where buyer and seller meet each other. The four essential components of a
market are- buyer, seller, product, voluntary exchange
All markets are not same- Types of Market- depends upon power of seller eg. Monopoly, perfect
competition
The market has many owners, hence not controlled by any one person. Buyers and sellers have high
knowledge about price.
Demand
Demand refers to the willingness to purchase and ability(money) to buy a good.
Both ability and willingness should be there
The term demand refers to the relationship between the price of a good and quantity demanded of
the good.
Price and quantity demanded are negatively related.
, Law of Demand- Holding everything else constant, when the price of a product increases the
quantity demanded will decrease, and when the price of a product decreases, the quantity
demanded will increase.
There is a negative relationship between P and Qd
Change in quantity demanded shows movement along the D- curve.
Kaylin’s Demand Schedule and Demand curve (price on y-axis, quantity demanded on x-axis, left
downward sloping graph
Demand curve- The curve that explains the relationship between P of a good and Qd by an individual
consumer, ceteris peribus
Difference between demand and quantity demanded- Demand is used when all the consumers
come together and quantity demanded when individual cosumer’s quantity demanded is referred.
(Price is determined in Quantity Demanded but not in market demand)
Other determinants of Demand other than price-
Substitution effect- When the price of good rises, consumer considers alternative options. They are
willing to substitute this good with other relatively less expensive goods. Example- Demand for
coffee will depend on price of tea, pepsi and coke.
Complementary goods- Goods which are consumed together. Example- cars and petrol, toys and
batteries, shoes and polish, shirt and tie
Decision on how much to buy- depends upon certain variables
Variables affecting Demand A change in this variable
Price Movement in demand curve
Income Shifts the demand curve
Price of related goods Shifts the demand curve
Tastes Shifts the demand curve
Population and Demographics Shifts the demand curve
Expected future prices Shifts the demand curve
Rightward shift in demand curve- Increase in demand
Leftward shift in demand curve- Decrease in demand
Exceptions to law of Demand
Giffen goods- Goods like medicine, food which don’t have alternatives available
Veblen goods- Luxury goods like Rolls Royce
Factors determining Demand-
1. Price of related goods-
Substitute goods
Complimentary goods
2. Income
will satisfy unlimited wants.
Three questions-
1. What goods & services get produced?
2. How they get produced?
3. Who gets the goods & services
Every choice involves a tradeoff- giving up one thing to get something else- study vs work,
spend vs save, defense vs healthcare spending.
Rational self-interest: all trade-offs are made to increase utility. We all have rational self-interest
(people are rational in nature)
Microeconomics- is the study of choices made by individuals and businesses, the way these choices
interact in markets, and the influence of governments.
1. Unlimited Needs
2. Unlimited wants
3. Scarcity of resources
4. Choice
Markets are institutions or arrangements that enable us to buy & sell- Products, buyers, sellers,
voluntary exchange.
An important tradeoff in economics is between efficiency and equity.
Economics involve trade-off between efficiency and equity
Efficiency: to produce maximum goods & services at the lowest cost.
Equity: Fair share of goods & services must be distributed
Factors of production in economics-
1. Land
2. Labour
3. Capital
4. Entrepreneurship
• Principle#1: OPPORTUNITY COST: (Choices involve cost of next best alternative forgone)
• Scarcity leads to trade-offs give-up/sacrifice something to
get another
• emphasises that every choice involves a cost — the cost of the alternative that was
foregone.
• Principle#2: MARGINAL PRINCIPLE (Think at the margin):
Marginal benefit: additional benefit from a small change in an activity.
, Marginal cost: additional cost from a small change in an activity.
“ It states that to increase the level of an activity as long as MB>MC. Choose
the level where MB=MC”.
• Assumptions to simplify: to simplify the argument: buying a packet of potato chips, costs $2.
An another packet available for 80 cents extra.
• Principle#3: PRINCIPLE OF DIMINISHING RETURNS:
Assume two inputs (land and capital, i.e., farm & tractor)
“ As more units of variable factor (tractor) are added to fixed factor (farm) then after
a point the extra (or marginal) output, from additional units, will decline”
Principle#4: Principle of Diminishing marginal utility
opportunity cost
Principle- Marginal principal
Marginal benefit- additional benefit occurred by a small change.
Principle- of Diminishing Returns (as we put on more costs, the percentage of returns start to
decrease after a certain point of time)
Ceteris Paribus- All other things being equal.
Demand- Lecture 2
Market is the place where buyer and seller meet each other. The four essential components of a
market are- buyer, seller, product, voluntary exchange
All markets are not same- Types of Market- depends upon power of seller eg. Monopoly, perfect
competition
The market has many owners, hence not controlled by any one person. Buyers and sellers have high
knowledge about price.
Demand
Demand refers to the willingness to purchase and ability(money) to buy a good.
Both ability and willingness should be there
The term demand refers to the relationship between the price of a good and quantity demanded of
the good.
Price and quantity demanded are negatively related.
, Law of Demand- Holding everything else constant, when the price of a product increases the
quantity demanded will decrease, and when the price of a product decreases, the quantity
demanded will increase.
There is a negative relationship between P and Qd
Change in quantity demanded shows movement along the D- curve.
Kaylin’s Demand Schedule and Demand curve (price on y-axis, quantity demanded on x-axis, left
downward sloping graph
Demand curve- The curve that explains the relationship between P of a good and Qd by an individual
consumer, ceteris peribus
Difference between demand and quantity demanded- Demand is used when all the consumers
come together and quantity demanded when individual cosumer’s quantity demanded is referred.
(Price is determined in Quantity Demanded but not in market demand)
Other determinants of Demand other than price-
Substitution effect- When the price of good rises, consumer considers alternative options. They are
willing to substitute this good with other relatively less expensive goods. Example- Demand for
coffee will depend on price of tea, pepsi and coke.
Complementary goods- Goods which are consumed together. Example- cars and petrol, toys and
batteries, shoes and polish, shirt and tie
Decision on how much to buy- depends upon certain variables
Variables affecting Demand A change in this variable
Price Movement in demand curve
Income Shifts the demand curve
Price of related goods Shifts the demand curve
Tastes Shifts the demand curve
Population and Demographics Shifts the demand curve
Expected future prices Shifts the demand curve
Rightward shift in demand curve- Increase in demand
Leftward shift in demand curve- Decrease in demand
Exceptions to law of Demand
Giffen goods- Goods like medicine, food which don’t have alternatives available
Veblen goods- Luxury goods like Rolls Royce
Factors determining Demand-
1. Price of related goods-
Substitute goods
Complimentary goods
2. Income
