Class -12
Economics Notes
Part-1
Introduction to Microeconomics
INTRODUCTION
Economy Economy refers to the nature and level of economic activities in an area.
It shows how the people of the concerned area earn their living.
Economy Economy refers to the nature and level of economic activities in an area.
It shows how the people of the concerned area earn their living.
Types of Economy
a. Market economies are those economies, in which economic activities are left to the free play of the market forces.
b. Centrally planned economies are those economies where the course of economic activities is dictated or decided by some central authority or by the government.
c. Mixed economies share the characteristics of both market and centrally planned economies.
b. Centrally planned economies are those economies where the course of economic activities is dictated or decided by some central authority or by the government.
c. Mixed economies share the characteristics of both market and centrally planned economies.
Central Problems of Economy at the Micro Level
The basic economic activities of life are :
Production, exchange and consumption of goods and services are among the basic economic activities of life.
Every society must decide on how to use its scarce resources.
The problems of an economy are summarized by the below points:
(i) What is produced and in what quantities?
Every society must decide on how much of each of the many possible goods and services it will produce.
Whether to:
a. produce more of food, clothing, housing or more luxury goods.
b. have more agricultural goods or have industrial products and services.
c. use more resources in education and health or to use more resources in building military services.
d. have more basic education or more of higher education.
e. have more of consumption goods or to have investment goods which will enhance production and consumption in future.
(ii)How are these goods produced?
Every society has to decide on how much of which of the resources to use in the production of each of the different goods and services.
The goods will be produced more whether by using more laobur or more machines.
What will be the availabe technologies to use for the production of each goods.
(iii) For whom are these goods produced?
Who gets how much of the goods that are produced in the economy?
How should the economy be distributed among the individuals in the economy?
Who gets more and who gets less?
Whether or not elementary education and basic health services should be available freely for everyone in the economy.
Hence,the allocation of scarce resources and the distribution of the final goods and services are the central problems of any economy.
Production, exchange and consumption of goods and services are among the basic economic activities of life.
Every society must decide on how to use its scarce resources.
The problems of an economy are summarized by the below points:
(i) What is produced and in what quantities?
Every society must decide on how much of each of the many possible goods and services it will produce.
Whether to:
a. produce more of food, clothing, housing or more luxury goods.
b. have more agricultural goods or have industrial products and services.
c. use more resources in education and health or to use more resources in building military services.
d. have more basic education or more of higher education.
e. have more of consumption goods or to have investment goods which will enhance production and consumption in future.
(ii)How are these goods produced?
Every society has to decide on how much of which of the resources to use in the production of each of the different goods and services.
The goods will be produced more whether by using more laobur or more machines.
What will be the availabe technologies to use for the production of each goods.
(iii) For whom are these goods produced?
Who gets how much of the goods that are produced in the economy?
How should the economy be distributed among the individuals in the economy?
Who gets more and who gets less?
Whether or not elementary education and basic health services should be available freely for everyone in the economy.
Hence,the allocation of scarce resources and the distribution of the final goods and services are the central problems of any economy.
The Centrally Planned Economy
In a centrally planned economy, the government or the central authority plans all the important activities in the economy.
All important decisions regarding production, exchange and consumption of goods and services are made by the government.
As an example, if it is found that a good or service which is very important for the prosperity and well-being of the economy as a whole,
like education or health service, is not produced in adequate amount by the individuals on their own, the government may also try to induce the
individuals to produce adequate amount of such a good or service or, alternatively, the government may itself decide to produce the good or service .
In a different context, if some people in the economy get so little a share of the final mix of goods and services produced in the economy
that their survival is at stake, then the central authority may intervene and try to achieve an equitable distribution of the final mix of goods and services.
All important decisions regarding production, exchange and consumption of goods and services are made by the government.
As an example, if it is found that a good or service which is very important for the prosperity and well-being of the economy as a whole,
like education or health service, is not produced in adequate amount by the individuals on their own, the government may also try to induce the
individuals to produce adequate amount of such a good or service or, alternatively, the government may itself decide to produce the good or service .
In a different context, if some people in the economy get so little a share of the final mix of goods and services produced in the economy
that their survival is at stake, then the central authority may intervene and try to achieve an equitable distribution of the final mix of goods and services.
The Market Economy
In a market economy, all economic activities are organised through the market.
It is important to note that the term ‘market’ as used in economics is quite different from the general understanding of a market.
For buying and selling commodities, individuals may or may not meet each other in an actual physical location.
The arrangements which allow people to buy and sell commodities freely are the defining features of a market.
In a market system, all goods or services come with a price at which the exchanges take place.
The price reflects, on an average, the society’s valuation of the good or service in question.
If the buyers demand more of a certain good, the price of that good will rise.
This signals to the producers of that good that the society as a whole wants more of that good than is currently being produced and the producers of
the good, in their turn, are likely to increase their production.
In this way, prices of goods and services send important information to all the individuals across the market
and help achieve coordination in a market system.
Thus, in a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities
brought about by the price signals.
In reality, all economies are mixed economies where some important decisions are taken by the government and the economic activities are by and large conducted through the market. The only difference is in terms of the extent of the role of the government in deciding the course of economic activities.
As an example, in the United States of America, the role of the government is minimal.
The best example of a centrally planned economy is the China for the major part of the twentieth century.
It is important to note that the term ‘market’ as used in economics is quite different from the general understanding of a market.
For buying and selling commodities, individuals may or may not meet each other in an actual physical location.
The arrangements which allow people to buy and sell commodities freely are the defining features of a market.
In a market system, all goods or services come with a price at which the exchanges take place.
The price reflects, on an average, the society’s valuation of the good or service in question.
If the buyers demand more of a certain good, the price of that good will rise.
This signals to the producers of that good that the society as a whole wants more of that good than is currently being produced and the producers of
the good, in their turn, are likely to increase their production.
In this way, prices of goods and services send important information to all the individuals across the market
and help achieve coordination in a market system.
Thus, in a market system, the central problems regarding how much and what to produce are solved through the coordination of economic activities
brought about by the price signals.
In reality, all economies are mixed economies where some important decisions are taken by the government and the economic activities are by and large conducted through the market. The only difference is in terms of the extent of the role of the government in deciding the course of economic activities.
As an example, in the United States of America, the role of the government is minimal.
The best example of a centrally planned economy is the China for the major part of the twentieth century.
POSITIVE AND NORMATIVE ECONOMICS
In principle there are more than one ways of solving the central problems of an economy.
These different mechanisms gives rise to different solutions to those problems, hence resulting in different allocations of the resources
and also different distributions of the final mix of goods and services produced in the economy.
In economics, different mechanisms are analysed and figure out the outcomes which are likely to result under each of these mechanisms.
More often than not a distinction is made between positive economic analysis and normative economic analysis depending on whether
we are trying to figure out how a particular mechanism functions or we are trying to evaluate it.
In positive economic analysis, how the different mechanisms function are studied whereas in normative economics,
whether these mechanisms are desirable or not are studied.
However, this distinction between positive and normative economic analysis is not a very sharp one.
The positive and the normative issues involved in the study of the central economic problems are very closely
related to each other and a proper understanding of one is not possible in isolation to the other.
These different mechanisms gives rise to different solutions to those problems, hence resulting in different allocations of the resources
and also different distributions of the final mix of goods and services produced in the economy.
In economics, different mechanisms are analysed and figure out the outcomes which are likely to result under each of these mechanisms.
More often than not a distinction is made between positive economic analysis and normative economic analysis depending on whether
we are trying to figure out how a particular mechanism functions or we are trying to evaluate it.
In positive economic analysis, how the different mechanisms function are studied whereas in normative economics,
whether these mechanisms are desirable or not are studied.
However, this distinction between positive and normative economic analysis is not a very sharp one.
The positive and the normative issues involved in the study of the central economic problems are very closely
related to each other and a proper understanding of one is not possible in isolation to the other.
Branches of Economics
Micro Economics: It studies the economic issues of an individual unit like an individual consumer, an individual producer etc.
Macro Economics
It studies the economic issues at the level of an economy as a whole live total employment of resources, total national product etc.
PPC (production Possibility Curve)
PPC (production Possibility Curve):
It shows different combinations of two goods, which can be produced with given resources and technology.
Opportunity Cost
It is the value of a factor in its next best alternative use.
Marginal Opportunity Cost
The rate at which output in use-1 is lost for every additional unit of output in use 2.
(ΔQ1/ΔQ2) implies marginal opportunity cost.
Macro Economics
It studies the economic issues at the level of an economy as a whole live total employment of resources, total national product etc.
PPC (production Possibility Curve)
PPC (production Possibility Curve):
It shows different combinations of two goods, which can be produced with given resources and technology.
Opportunity Cost
It is the value of a factor in its next best alternative use.
Marginal Opportunity Cost
The rate at which output in use-1 is lost for every additional unit of output in use 2.
(ΔQ1/ΔQ2) implies marginal opportunity cost.
Theory of Consumer Behavior
UTILITY
Utility of a commodity is its want-satisfying capacity.
The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity.
Utility is subjective. Different individuals can get different levels of utility from the same commodity.
For example, some one wholikes biscuits will get much higher utility from a biscuit than some one who is not so fond of biscuits.
Also, utility that one individual gets from the commodity can change with change in place and time.
For example, utility from the use of a fan will depend upon whether the individual is in cold place or hot place or whether it is summer or winter (time).
Utility of a commodity is its want-satisfying capacity.
The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity.
Utility is subjective. Different individuals can get different levels of utility from the same commodity.
For example, some one wholikes biscuits will get much higher utility from a biscuit than some one who is not so fond of biscuits.
Also, utility that one individual gets from the commodity can change with change in place and time.
For example, utility from the use of a fan will depend upon whether the individual is in cold place or hot place or whether it is summer or winter (time).
Cardinal Utility Analysis
Cardinal utility analysis assumes that level of utility can be expressed in numbers.
Measures of Utility
Total Utility:
Total utility of a fixed quantity of a commodity (TU) is the total satisfaction derived from consuming the given amount of some commodity x.
More of commodity x provides more satisfaction to the consumer.
TU depends on the quantity of the commodity consumed.
Therefore, TUn refers to total utility derived from consuming n units of a commodity x.
Marginal Utility:
Marginal utility (MU) is the change in total utility due to consumption of one additional unit of a commodity.
For example, suppose 4 bananas give us 28 units of total utility and 5 bananas give us 30 units of total utility.
Clearly, consumption of the 5th banana has caused total utility to increase by 2 units (30 units minus 28 units).
Therefore, marginal utility of the 5th banana is 2 units.
MU5 = TU5 – TU4 = 30 – 28 = 2
In general, MUn = TUn – TUn-1, where subscript n refers to the nth unit of the commodity
Total utility and marginal utility can also be related in the following way.
TUn = MU1 + MU2 + … + MUn-1 + MUn
This simply means that TU derived from consuming n units of bananas is the sum total of marginal utility of first banana (MU1), marginal utility of second banana (MU2),
and so on, till the marginal utility of the nth unit.
Measures of Utility
Total Utility:
Total utility of a fixed quantity of a commodity (TU) is the total satisfaction derived from consuming the given amount of some commodity x.
More of commodity x provides more satisfaction to the consumer.
TU depends on the quantity of the commodity consumed.
Therefore, TUn refers to total utility derived from consuming n units of a commodity x.
Marginal Utility:
Marginal utility (MU) is the change in total utility due to consumption of one additional unit of a commodity.
For example, suppose 4 bananas give us 28 units of total utility and 5 bananas give us 30 units of total utility.
Clearly, consumption of the 5th banana has caused total utility to increase by 2 units (30 units minus 28 units).
Therefore, marginal utility of the 5th banana is 2 units.
MU5 = TU5 – TU4 = 30 – 28 = 2
In general, MUn = TUn – TUn-1, where subscript n refers to the nth unit of the commodity
Total utility and marginal utility can also be related in the following way.
TUn = MU1 + MU2 + … + MUn-1 + MUn
This simply means that TU derived from consuming n units of bananas is the sum total of marginal utility of first banana (MU1), marginal utility of second banana (MU2),
and so on, till the marginal utility of the nth unit.
Budget Set
a.It refers to attainable combinations of a set of two goods, given prices of goods and income of the consumer.
b.Budget Line It is a line showing different possible combinations of Good-l and Good-2, which a consumer can buy, given his budget
and the prices of Good-l and Good-2.
b.Budget Line It is a line showing different possible combinations of Good-l and Good-2, which a consumer can buy, given his budget
and the prices of Good-l and Good-2.
Monotonic Preferences
A consumer preferences are monotonic if and only if between any two bundles.
The consumer prefers the bundles, which has more of at least one of the goods and no less of the other good as compared to the other bundle.
The consumer prefers the bundles, which has more of at least one of the goods and no less of the other good as compared to the other bundle.
Indifference Curve
A curve which is a diagrammatic presentation of an indifference set.
It shows different combinations of two commodities between which a consumer is indifferent.
Each combination offers him the same level of satisfaction.
It shows different combinations of two commodities between which a consumer is indifferent.
Each combination offers him the same level of satisfaction.
Marginal Rate of Substitution
It refers to the rate which the consumer is willing to substitute Good-x for Good-y or it refers to the number of units of Good-y
which the consumer is willing to sacrifice for an additional unit of Good-x,
Representation: Δy/Δx
Note: The collection of indifference curve is called indifference map.
which the consumer is willing to sacrifice for an additional unit of Good-x,
Representation: Δy/Δx
Note: The collection of indifference curve is called indifference map.
Properties of Indifference Curve
(i) Indifference curves are negatively sloped.
(ii) Indifference curves are convex to the point of origin.
(iii) Indifference curves never touch or intersect. each other.
(iv) Indifference curve touches neither X-axis nor Y-axis
Conditions for Consumer’s optimum
(i) Budget line should be tangent to the [C.]
(ii) Slope of IC = Slope to the budget line.
(MRS = Price ratio)
(ii) Indifference curves are convex to the point of origin.
(iii) Indifference curves never touch or intersect. each other.
(iv) Indifference curve touches neither X-axis nor Y-axis
Conditions for Consumer’s optimum
(i) Budget line should be tangent to the [C.]
(ii) Slope of IC = Slope to the budget line.
(MRS = Price ratio)
Demand
Demand refers to the desire to buy a commodity backed by willingness and ability to purchase that commodity at a given point of time.
According to Prof RG Lipsey, “The amount of a commodity that households wish to purchase is called the quantity demanded of that commodity”
1. Demand Function
qx = F(Px)
where, qx = quantity of x Commodity
Px = Price of x commodity
2.Demand Schedule
Tabular presentation of relationship between price and demand of a commodity is called Demand schedule.
3.Linear Demand
d = a – bp
Here, d = Quantity demanded
a = Vertical intercept
b = Slope of the demand curve
p = Price of the commodity
4.Demand Curve
Graphical presentation of relationship between price and demand of a commodity is called Demand curve.
5.Law of demand
The law states that other things remaining the same, the demand for a commodity expands with fall in its price and contracts with a rise in its price.
6.Exceptions to the Law of Demand
(a) Expectations of further changes in price
(b) Prestige goods
(c) Giffen goods
(d) Necessities
7. Determinants of Den land
(a) Price of the commodity
(b) Income of the consumer
(c) Price of related goods
(d) Taste and preference
8. Normal Goods
It is a good whose demand increases with rise in income and decreases with fall in income of the consumer. e.g; full-cream milk, wheat.
9. Inferior Goods
It is a good whose demand decreases with rise in income and increases with fall in income of the consumer.
For e.g; bajra, toned milk.
10.Giffen Goods
Giffen goods arc those inferior goods in case of which there is a positive relationship between price and quantity demanded
and inverse relationship between income and quantity demanded.
11.Cross Price Effect
It refers to change in demand for one commodity owing to change in price of other commodity.
12. Complementary Goods
These are those goods which are used simultaneously. If price of one good increases, demand for its complementaries will
decrease and vice-versa. e.g., pen and ink.
According to Prof RG Lipsey, “The amount of a commodity that households wish to purchase is called the quantity demanded of that commodity”
1. Demand Function
qx = F(Px)
where, qx = quantity of x Commodity
Px = Price of x commodity
2.Demand Schedule
Tabular presentation of relationship between price and demand of a commodity is called Demand schedule.
3.Linear Demand
d = a – bp
Here, d = Quantity demanded
a = Vertical intercept
b = Slope of the demand curve
p = Price of the commodity
4.Demand Curve
Graphical presentation of relationship between price and demand of a commodity is called Demand curve.
5.Law of demand
The law states that other things remaining the same, the demand for a commodity expands with fall in its price and contracts with a rise in its price.
6.Exceptions to the Law of Demand
(a) Expectations of further changes in price
(b) Prestige goods
(c) Giffen goods
(d) Necessities
7. Determinants of Den land
(a) Price of the commodity
(b) Income of the consumer
(c) Price of related goods
(d) Taste and preference
8. Normal Goods
It is a good whose demand increases with rise in income and decreases with fall in income of the consumer. e.g; full-cream milk, wheat.
9. Inferior Goods
It is a good whose demand decreases with rise in income and increases with fall in income of the consumer.
For e.g; bajra, toned milk.
10.Giffen Goods
Giffen goods arc those inferior goods in case of which there is a positive relationship between price and quantity demanded
and inverse relationship between income and quantity demanded.
11.Cross Price Effect
It refers to change in demand for one commodity owing to change in price of other commodity.
12. Complementary Goods
These are those goods which are used simultaneously. If price of one good increases, demand for its complementaries will
decrease and vice-versa. e.g., pen and ink.
Price Elasticity of Demand
It is the degree of responsiveness of quantity demanded of a commodity to the change in its price.
1.Methods of Measuring Elasticity of Demand
(i) Percentage Method
ed = % change in quantity demanded/% change in price
or
ΔQ/ ΔP x P/Q
Here,P= Actual price, Q = Actual quantity
ΔP = Change in price, ΔQ = Change in quantity
(ii) Total Expenditure Method
TE=PxQ
P = Price, Q= quantity, TE = Total expenditure
(iii) Geometric or Print Method
ed = Lower Segment of demand curve/Upper segment of demand curve
2. Degrees of Price Elasticity of Demand
i) Pefectly Elastic Demand (ed= ∞)
(ii) More than unit elastic or elastic demand (ed > 1)
(iii) Less than unit elastic or inelastic demand (ed < 1)
(iv) Unit elastic demand (ed = 1)
(v) Perfectly inelastic demand (ed = 0)
3.Factors Influencing the Elasticity of Demand
(i) Substitute goods
(ii) postponement of consumption
(iii) Proportion of expenditure
(iv) Nature of the commodity
(v) Uses of the commodity
(vi) The time period
(vii) Income
(viii) Habbits
1.Methods of Measuring Elasticity of Demand
(i) Percentage Method
ed = % change in quantity demanded/% change in price
or
ΔQ/ ΔP x P/Q
Here,P= Actual price, Q = Actual quantity
ΔP = Change in price, ΔQ = Change in quantity
(ii) Total Expenditure Method
TE=PxQ
P = Price, Q= quantity, TE = Total expenditure
(iii) Geometric or Print Method
ed = Lower Segment of demand curve/Upper segment of demand curve
2. Degrees of Price Elasticity of Demand
i) Pefectly Elastic Demand (ed= ∞)
(ii) More than unit elastic or elastic demand (ed > 1)
(iii) Less than unit elastic or inelastic demand (ed < 1)
(iv) Unit elastic demand (ed = 1)
(v) Perfectly inelastic demand (ed = 0)
3.Factors Influencing the Elasticity of Demand
(i) Substitute goods
(ii) postponement of consumption
(iii) Proportion of expenditure
(iv) Nature of the commodity
(v) Uses of the commodity
(vi) The time period
(vii) Income
(viii) Habbits
POCKET NOTES
1. The budget set is the collection of all bundles of goods that a consumer can buy with her income at the prevailing market prices.
2. The budget line represents all bundles which cost the consumer her entire income.
The budget line is negatively sloping.
3. The budget set changes if either of the two prices or the income changes.
4. The consumer has well-defined preferences over the collection of all possible bundles.
She can rank the available bundles according to her preferences over them.
5. The consumer’s preferences are assumed to be monotonic.
6 . An indifference curve is a locus of all points representing bundles among which the consumer is indifferent.
7. Monotonicity of preferences implies that the indifference curve is downward sloping.
8. A consumer’s preferences, in general, can be represented by an indifference map.
9. A consumer’s preferences, in general, can also be represented by a utility function.
10. A rational consumer always chooses her most preferred bundle from the budget set.
11. The consumer’s optimum bundle is located at the point of tangency between the budget line and an indifference curve.
12. The consumer’s demand curve gives the amount of the good that a consumer chooses at different levels of its price when the price of other goods, the consumer’s
income and her tastes and preferences remain unchanged.
13. The demand curve is generally downward sloping.
14. The demand for a normal good increases (decreases) with increase (decrease) in the consumer’s income.
15. The demand for an inferior good decreases (increases) as the income of the consumer increases (decreases).
16. The market demand curve represents the demand of all consumers in the market taken together at different levels of the price of the good.
17. The price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price.
18. The elasticity of demand is a pure number.
19. Elasticity of demand for a good and total expenditure on the good are closely related.
20. BEST OF LUCK
2. The budget line represents all bundles which cost the consumer her entire income.
The budget line is negatively sloping.
3. The budget set changes if either of the two prices or the income changes.
4. The consumer has well-defined preferences over the collection of all possible bundles.
She can rank the available bundles according to her preferences over them.
5. The consumer’s preferences are assumed to be monotonic.
6 . An indifference curve is a locus of all points representing bundles among which the consumer is indifferent.
7. Monotonicity of preferences implies that the indifference curve is downward sloping.
8. A consumer’s preferences, in general, can be represented by an indifference map.
9. A consumer’s preferences, in general, can also be represented by a utility function.
10. A rational consumer always chooses her most preferred bundle from the budget set.
11. The consumer’s optimum bundle is located at the point of tangency between the budget line and an indifference curve.
12. The consumer’s demand curve gives the amount of the good that a consumer chooses at different levels of its price when the price of other goods, the consumer’s
income and her tastes and preferences remain unchanged.
13. The demand curve is generally downward sloping.
14. The demand for a normal good increases (decreases) with increase (decrease) in the consumer’s income.
15. The demand for an inferior good decreases (increases) as the income of the consumer increases (decreases).
16. The market demand curve represents the demand of all consumers in the market taken together at different levels of the price of the good.
17. The price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price.
18. The elasticity of demand is a pure number.
19. Elasticity of demand for a good and total expenditure on the good are closely related.
20. BEST OF LUCK
No comments:
Post a Comment