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Subject :introduction to economicsObjectives of course:- By the end of the course, successful student should be able to: 1. Perform supply and demand analysis to analyze the impact of economic events on markets; 2. Understand and analyze the behavior of consumers in the market; 3 . Understand, analyze and evaluate factors affecting the behavior of producers;

Introduction to Course1-1 Definition of economic1-2 Economic resources 1-3 Economic Problems

2- Demand

2-1 Definition of demand2-2 Law of demand2-3 Determinants of demand2-4 Elasticity of demand

3-Supply

3-1 Definition of supply3-2 Law of supply3-3 Determinants of supply3-4 Elasticity of supply

4-Equilibrium price

5-Theory of Consumer Behavior5-1 Cardinal utility approach5-2 Indifference curve approach6-Theory of producer Behavior6-1 Diminishing marginal rate6-2Isoquant curve

7 Cost of production 7-1Concept of cost7-2Major component of costReferencem.l.shrma,1993.c.a foundation course economics

Definition of economics:-

Economics is the study of the allocation of scarce resources to .meet unlimited human wantsa. Microeconomics - is concerned with decision-making by individual economic agents such as firms and consumers. (Subject matter of this course).b. Macroeconomics - is concerned with the aggregate performance of the entire economic system. (Subject matter of the following course).

Economics resources:-Economics resources are used to produce goods and services. There are three categories of economic resourcesnatural resources - raw materialslabor - workerscapital - buildings, machinery, factories, equipment

Economic Problem:-The economizing problem involves the allocation of resources among competing wants. There is an economizing problem because there are:1-unlimited wants..2-limited resources The economic problem, also known as scarcity problem., refers to the gap between the limited resources and the unlimited needs and wants of the society(Economic Problem =) implies Choice = implies Opportunity CostThe scarcity problem, i.e., the economic problem, implies that we must make a choice. This means that we have to choose among different alternatives.. Every choice we make involves an opportunity sacrificed opportunity cost).The opportunity cost of any decision is the gain that otherwise could have been obtained if we did not make that decisionThe Production Possibility Frontier (PPF)The Production Possibility Frontier (PPF) as an A application to the Opportunity Cost .Concept The PPF is a curve that represents all possible combinations of total output that could be produced using a fixed amount (full utilization) of resources in an efficient way. A. Peoples desires are unlimited, but resources are limited, therefore individuals must make trade-offs. We need economics to study this fundamental conflict and how these trade-offs are best made.

Four basic questions must be answered by any economic institution:

1) What goods and services should be produced and in what quantity?(2) How should the product be produced?

(3) For whom should it be produced and how should it be distributed?(4) Who makes the decision?

The answers depend on the use of economic institutions. There are two basic economic

1-Market economic institution (the price mechanism): Most decisions on economic activities are made by individuals.2- Planed economic institution: Most decisions on economic activities aremade by governments, which are mainly centralized decision systemsdemandDemand of any goods or services is defined as the quantity of the good or services the consumers are willing to purchase and have a financial ability to purchase at the current price prevailed in specific market during certain period of time.

The law of demand seeking to establish the inverse relationship between price and quantity demand is also known as the law of downward-sloping demandLaw of demandPrice per unitQuantity demand10 100 1190 1280 1370 14 60 1550 1640 1730 1820 1910 200

Law of demand: why demand curve slopes downwardThe Law of Diminishing Marginal UtilityPrice Effect= Income Effect + Substitution EffectThe Law of Diminishing Marginal Utility:

According to Marshallian analysis (Utilities Analysis) of demand, as consumer consumes more and more units of commodity its marginal utility (utility from successive units) goes on diminishing and so it is only at a diminishing prices that a consumer would like to demand larger quantity of a commodity. Hence, price and quantity effect demanded are inversely related.

Income EffectIf the price of a commodity decline, the real income(purchasing power of money income) of the household increase.As a result of this the household can buy more quantity of commodity with the same amount of money.

Substitution EffectSubstitution effect implies that every household has a tendency to substitute relatively cheaper commodity in place of relatively costlier commodity). In short as a result of the fall in the prize of commodity, its quantity demanded increases party due to income effect and partly due to substitution effect.

Determinants of demands1- The price of the commodity2- The prices of the related commodities3- The size of households income 4- Consumer taste and preference 5- Consumer expectation about future price of x 1-The law of diminishing marginal utility2-Price effect= income effect+ substitution effect

Shift in the demand curveA shift in the demand curve occurs when the change in the demand for a commodity is brought by change in any of the determinants of demand other than its own price. The shift of the demand curve to the left indicates decrease in demand, whereas its shift to the right shows an increase in demands.

Concept of Elasticity of Demand

The term Elasticity of demand refer to the degree in the demand for a commodity in response to change in any of its determinants.

Price Elasticity of DemandsRatio of the percentage change in the quantity demanded of a commodity to the percentage change in its own price.

Ep= Percentage change in the quantity demanded of commodity Percentage change in the price of the commodityWhere, ep denotes price elasticity of demandq stands for original quantity demandedp stands for original priceq signifies changes in the quantity of demandedp denotes change in the price

:Example Given following data, calculate the price elasticity of demand when the price increases from 3per unit to 4 per unit

3456p21201500900500q

ep

= 0.87

Cross Elasticity of demandDefined as a ratio of percentage change in the quantity demanded of x commodity to percentage change in the price of y commodity.

Ec = Percentage change in the quantity demanded of X commodityPercentage change in the price of Y commodityexampleThe price of coffee falls from Rx. 80 per kg to Rs. 40 per kg and as a result the demand for tea declines from 20 kg to 10 kg What is the cross elasticity of demand of the tea for coffee?

= 1

Income Elasticity of DemandThe income elasticity of demand measures the extent to which quantity demanded changes in response of change in the income of the consumer.

ey = Percentage change in the quantity demanded Percentage change in the income of the consumer

- Where, q denotes original demandy denotes original income of the consumerq change in the quantity demandedy change in the income of the consumerexampleIf a consumers demand for a commodity increases from 50 grams per week to 150 grams per week when his income rises from Rs. 1.000 to Rs. 2.000. What is the income elasticity of demand?

2 =

2. Degrees of Price Elasticity of Demand

(1-Perfectly Inelastic Demand (ep=02. Relatively Inelastic Demand (1 >ep > o) 3. Unitary Elastic Demand (ep = 1)4. Relatively Elastic Demand (> ep> 1)5. Perfectly Elastic Demand (ep = )

supplySupply may be defined as the quantity of a particular commodity, which the firm offers for sale at a particular price at a given point of time.

The Law of SupplyThe law of supply, expresses the direct relationship between the price of a commodity and its quantity supplied.

quantity supplyPrice per unit01010112012301340145015601670178018901910020

The determinants of Supply:Price of the commodity Price of Related Commodities Price of the Factors of ProductionState of Technology Tax and Subsidy

Elasticity of Supply

The elasticity of supply indicated the degree of changes in the quantity supplied in response to changes in the price of the commodity.

Es = Percentage change in the quantity supply Percentage change in the price

Where q denoted original quantity supplied.q denoted change in quantity supplied.p denotes original price. p signifies changes in the price . exampleThe quantities supplied of a commodity are 150 grams at price Rs. 10 per gram and 250 grams at Rs. 15 per gram. Calculate the elasticity of supply.

Degrees of Price Elasticity of supplyPerfectly Inelastic Supply (es= 0) Unitary Elastic Supply (es = 1) Relatively Greater Elastic Supply (es> 1) Relatively Less Elastic Supply(es< 1) Perfect Elastic Supply (es = )Equilibrium price:

Actual price of the commodity in the market is determinate by supply and demand.

Quantity supply quantity demandPrice per unit01001o109011208012307013406014505015604016703017802018901019100020 Its note from the figure above the price 15 the only price between different prices in it quantity supplied equal the quantity demanded, which equal 50. The equilibrium price 15 and equilibrium quantity 50.