1. Unit 1 Introduction to Economics Guided By: Prof. Uday Kakkad Prepared By: BOPALIYA MAMATA D(130590107008)

2. Economics Economics  “Engineering economics deals with the methods that enable one to take economic decisions towards minimizing costs and/or maximizing benefits to business organizations.”  “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”

3. NATURE OF ECONOMICS  Traditional economic theory has developed along two lines; (1) Normative and (2) positive.  Normative focuses on prescriptive statements, and help establish rules aimed at attaining the specified goals of business.  Positive, on the other hand, focuses on description it aims at describing the manner in which the economic system operates without staffing how they should operate.  The emphasis in business economics is on normative theory. Business economic seeks to establish rules which help business firms attain their goals, which indeed is also the essence of the word normative.

4. NATURE OF ECONOMICS  However, if the firms are to establish valid decision rules, they must thoroughly understand their environment. This requires the study of positive or descriptive theory.  Thus, Business economics combines the essentials of the normative and positive economic theory, the emphasis being more on the former than the latter.

5. SCOPE OF ECONOMICS  we can list some of the major branches of economics as under: 1. Microeconomics:  This is considered to be the basic economics. Microeconomics may be defined as that branch of economic analysis which studies the economic behavior of the individual unit, may be a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. Most production and welfare theories are of the microeconomics variety.

6. SCOPE OF ECONOMICS 2. Macroeconomics:  Macroeconomics may be defined as that branch of economic analysis which studies behavior of not one particular unit, but of all the units combined together.  Macroeconomics is a study in aggregates. Hence it is often called Aggregative Economics.  It is, indeed, a realistic method of economic analysis, though it is complicated and involves the use of higher mathematics. In this method, we study how the equilibrium in the economy is reached consequent upon changes in the macro-variables and aggregates.

7. SCOPE OF ECONOMICS 3. International economics:  As the countries of the modern world are realizing the significance of trade with other countries, the role of international economics is getting more and more significant nowadays. 4. Public finance:  The great depression of the 1930s led to the realization of the role of government in stabilizing the economic growth besides other objectives like growth, redistribution of income, etc.  Therefore, a full branch of economics known as Public Finance or the fiscal economics has emerged to analyze the role of government in the economy.

8. SCOPE OF ECONOMICS 5. Development economics:  As after the second world war many countries got freedom from the colonial rule, their economics required different treatment for growth and development.  This branch developed as development economics. 6. Health economics:  A new realization has emerged from human development for economic growth. Therefore, branches like health economics are gaining momentum. Similarly, educational economics is also coming up.

9. SCOPE OF ECONOMICS 7. Environmental economics:  Unchecked emphasis on economic growth without caring for natural resources and ecological balance, now, economic growth is facing a new challenge from the environmental side. 8. Urban and rural economics:  Role of location is quite important for economic attainments. There is also much debate on urban-rural divide.  Therefore, economists have realized that there should be specific focus on urban areas and rural areas. Therefore, there is expansion of branches like urban economics and rural economics.

10. Difference: PointsMicroeconomicsMacroeconomics 1Study matters It studies about individual economic units like households, firms, consumers, etc. It studies about an economy as a whole. 2Deals with It deals with how consumers or producers make their decisions depending on their given budget and other variables. It deals with how different economic sectors such as households, industries, government and foreign sector make their decisions. 3Method It uses the method of partial equilibrium, i.e. equilibrium in one market. It uses the method of general equilibrium, i.e. equilibrium in all markets of an economy as a whole. 4Variables The major microeconomic variables are price, individual consumer’s demand, wages, rent, profit, revenues, etc. The major macroeconomic variables are aggregate price, aggregate demand, aggregate supply, inflation, unemployment, etc. 5Theories Various theories studied are: 1) Theory of Consumer’s Behaviour and Demand 1) Theory of National Income 2) Theory of Producer’s Behaviour and Supply 2) Theory of Money 3) Theory of Price Determination under Different Market Conditions 3) Theory of General Price Level 4) Theory of Employment 5) Theory of International Trade

11. MEANING OF DEMAND  In economics, demand is the utility for a good or service of an economic agent, relative to his/her income.  Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or service.  Demand refers to how much (quantity) of a product or service is desired by buyers at various prices.

12. DETERMINANT OF DEMAND 1.Income:  One reason is that your income is not large enough to be able to afford this amount. Therefore, income must be one of the factors that affect the demand for a given product.  Normally, we expect that as one's income rises (falls), the demand for a product will rise (fall). Because we normally expect this to be true, a good for which this statement is true is called a normal good.  Occasionally, we shall encounter a good for which the statement is not true. These are called inferior goods; for these goods, as income rises (falls), the demand for the product falls (rises).

13. DETERMINANT OF DEMAND 2.Price of Complement:  One factor might involve the method you will use to pay for this home --- borrowing money.  The price of borrowing money is called the interest rate. The interest rate is one example of the price of a complement.  A complement is a different good that goes together with the one under consideration. Homes and borrowing money tend to go together.  When interest rates rise, people are less likely to borrow. If they do not borrow, they will not buy the homes.  if the price of the complement rises (falls), the demand for the product (homes) falls (rises).

14. DETERMINANT OF DEMAND 3.Price of Substitute Good:  Substitutes are different goods that compete with the one under consideration. Coca-Cola and Pepsi Cola are substitutes.  As the price of the substitute (apartments) rises (falls), the demand for the product (homes) rises (falls). 4.Tastes or Preferences:  Tastes or Preferences involves the fact that there are certain psychological reasons for liking or disliking a particular good.  Our principle is: the more (less) we like a good or service, the greater (less) is our demand for it

15. DETERMINANT OF DEMAND 5.Expectations  The buyer expects the price to rise. These expectations affect our demand for many products. Our principle here is: if buyers expect the price to rise (fall), the demand rises (falls) today.  There are other kinds of expectations one might have that will affect the demand for products. If one expects that the product will soon be unavailable, the demand will rise today.  Also, if one expects that one‘s income will fall, the demand for most products will fall.

16. DETERMINANT OF DEMAND 6.Population  The last of the factors affecting demand is the population (number of buyers).  Therefore, if there are more buyers, there must be more market demand.

17.  In economics, supply refers to the amount of a product that producers and firms are willing to sell at a given price when all other factors being held constant.  In other words of Meyer “Supply is a schedule of the amount of a good that would be offered for sale at all possible prices at any period of time; e.g. a day, a week and so on.” MEANING OF SUPPLY

18. DETERMINANT OF SUPPLY 1.Number of Sellers  Greater the number of sellers, greater will be the quantity of a product or service supplied in a market and vice versa.  Thus increase in number of sellers will increase supply and shift the supply curve rightwards whereas decrease in number of sellers will decrease the supply and shift the supply curve leftwards.  For example, when more firms enter an industry, the number of sellers increases thus increasing the supply.

19. DETERMINANT OF SUPPLY (Cont…) 2.Technology  Improvement in technology enables more efficient production of goods and services. Thus reducing the production costs and increasing the profits.  As a result supply is increased and supply curve is shifted rightwards. Since technology in general rarely deteriorates, therefore it is needless to say that deterioration of technology reduces supply.

20. DETERMINANT OF SUPPLY (Cont…) 3.Suppliers' Expectations  Change in expectations of suppliers about future price of a product or service may affect their current supply. However, unlike other determinants of supply, the effect of suppliers' expectations on supply is difficult to generalize.  For example when farmers suspect the future price of a crop to increase, they will withhold their agricultural produce to benefit from higher price thus reducing the supply.  In case of manufacturers, when they expect the future price to increase, they will employ more resources to increase their output and this may increase current supply as well.

21. DETERMINANT OF SUPPLY (Cont…) 4.Selling Price:  Selling price is decided after adding certain amount of profit in the cost. If selling price is increased, the profit will also increases.  This increase the profit of the seller, which motivates to supply more quality.So, increase in selling price increase the supply of good.

22. DETERMINANT OF SUPPLY (Cont…) 5.Price of Raw Material:  Price of raw materials directly effects the quality supplied in the market. Keeping the selling price constant, if the prices of raw materials required to produce the goods increases, the seller will produce less amount of goods. So, this reduces the quantity of supplied goods.

23. LAW OF DEMAND  In economics, the law states that, all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.  As the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.  The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.

24. LAW OF DEMAND (Cont…)  The chart below depicts the law of demand using a demand curve, which is always downward sloping.

25. LAW OF DEMAND (Cont…)  Each point on the curve (A, B, C) reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.  The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls.  When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen.  When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.

26. LAW OF SUPPLY  In economics, the law states that, all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.  As the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.  The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale.

27. LAW OF DEMAND (Cont…)  The chart below depicts the law of supply using a supply curve, which is always upward sloping.

28. LAW OF DEMAND (Cont…)  A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and the price will be P1, and so on.  The law of supply summarizes the effect price changes have on producer behavior. For example, a business will make more video game systems if the price of those systems increases.  When college students learn computer engineering jobs pay more than English professor jobs, the supply of students with majors in computer engineering will increase.

29. Equilibrium  When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium.  At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.  Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

30. Equilibrium(Cont…)  As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency.

31. Equilibrium(Cont…)  At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.  In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

32. Elasticity  The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer.  A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied.  To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change in quantity / % change in price)

33. Types of Elasticity  There are three types of Elasticity: A.Price Elasticity of Demand B.Income Elasticity of Demand C.Cross Elasticity of Demand

34. Types of Elasticity (Cont…) A.Price Elasticity of Demand  A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price.  The formula for calculating price elasticity of demand is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price  If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes).

35. Types of Elasticity (Cont…)  Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price).  When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price).  Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).  For example, if the quantity demanded for a good increases 15% in response to a 10% decrease in price, the price elasticity of demand would be 15% / 10% = 1.5.

36. Types of Elasticity (Cont…) B.Income Elasticity of Demand  A measure of the relationship between a change in the quantity demanded for a particular good and a change in real income.  The formula for calculating income elasticity of demand is: Income Elasticity of Demand = % change in quantity demanded / % change in income  If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes).

37. Types of Elasticity (Cont…)  For example, if the quantity demanded for a good increases for 15% in response to a 10%increase in income, the income elasticity of demand would be 15% / 10% = 1.5.  The degree to which the quantity demanded for a good changes in response to a change in income depends on whether the good is a necessity or a luxury.

38. Types of Elasticity (Cont…) C.Cross Elasticity of Demand  An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another good.  The measure is calculated by taking the percentage change in the quantity demanded of one good, divided by the percentage change in price of the substitute good: The formula for calculating income elasticity of demand is: Cross Elasticity of Demand = % change in quantity demanded of good-1 / % change in the price of good-2

39. Types of Elasticity (Cont…)  The cross elasticity of demand for substitute goods will always be positive, because the demand for one good will increase if the price for the other good increases.  For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for tea (a substitute beverage) will increase as consumers switch to an alternative.