Economics: is the social science that studies the choices that individuals,

businesses, governments, and entire societies make as they cope(deal with) with
scarcity and the incentives that influence(effect) and reconcile(merge) those
choices.

The subject has two parts: ■ Microeconomics ■ Macroeconomics

Micro Economics: The branch of economics concerned with signals factors and two effects of
individuals decisions.

Macro Economics: The branch of economics concerned with two large scale or two generals
economics factors, such as interest rates and the nation productivity.

Scarcity: The state of being scare or in short supply. We want more than we can get. Our
inability to get everything we want is called scarcity. Scarcity is universal. It confronts all living
things. Even parrots face scarcity!

Scarcity is the result of people having unlimited wants and needs or always something new and
having limited resources.

Choice: Choice refers to the ability of a consumers or producers to decide which goods, service
or resource to purchase or provide from a range of possible options.

Concept of Demand:

Demand: It referred to consumers’ willingness to purchase goods and services .As he must
have enough money and resources to fulfill his desire or demand.

Law:

 When the price of the thing increases its demand will decreases and
when the price decreases the demand will increases.
 Other things remaining the same, the higher the price of a good, the
smaller is the quantity demanded; and the lower the price of a good, the
greater is the quantity demanded.
A higher price reduces the quantity demanded for two reasons:
 Substitution Effect: When the price of a good rises, other things
remaining the same, its relative price— its opportunity cost—rises.
Although each good is unique, it has substitutes—other goods that can be
used in its place.
 Income Effect: When a price rises, other things remaining the same,
the price rises relative to income. Faced with a higher price and an
unchanged income, people cannot afford to buy all the things they
previously bought. They must decrease the quantities demanded of at least
some goods and services. Normally, the good whose price has increased will
be one of the goods that people buy less of.
The distinction between demand and quantity demanded:
The term demand refers to the entire relationship between the price of a
good and the quantity demanded of that good. Demand is
illustrated(represented) by the demand curve and the demand schedule.
The term quantity demanded refers to a point on a demand curve—the
quantity demanded at a particular price.
Six main factors bring changes in demand. They are changes in

1. The prices of related goods/Subtitutes, For example, a

bus ride is a substitute for a train ride and an energy drink is
a substitute for an energy bar. If the price of a substitute for
an energy bar rises, people buy less of the substitute and
more energy bars. For example, if the price of an energy
drink rises, people buy fewer energy drinks and more energy
bars. The demand for energy bars increases.
A complement is a good that is used in conjunction with
another good. If the price of an hour at the gym falls, people
buy more gym time and more energy bars.
2. Expected future prices:If it is suspected about a good
that in future it price will rise then the people will buy more
that good, thus the current demand of good will increase but
its future will decrease. For Example:If you
expect that the price of tomatoes will increase by next
week,so you buy enough tomatoes for next week.Thus the
current demand of tomatoes has increased and its future
demand for next week has decreased. Computer prices are
constantly falling, and this fact poses a dilemma. Will you
buy a new computer now, in time for the start of the school
year, or will you wait until the price has fallen some more?
Because people expect computer prices to keep falling, the
current demand for computers is less (and the future
demand is greater) than it otherwise would be.
3. Income: Consumers’ income influences demand. When
income increases, consumers buy more of most goods; and
when income decreases, consumers buy less of most goods.
Although an increase in income leads to an increase in the
demand for most goods, it does not lead to an increase in
the demand for all goods. A normal good is
one for which demand increases as income increases.
An inferior good is one for which demand decreases as
income increases. As incomes increase, the demand for air
travel (a normal good) increases and the demand for long-
distance bus trips (an inferior good) decreases.
4. Expected future income and credit: When expected
future income increases or credit becomes easier to get,
demand for the good might increase now. For example, a
salesperson gets the news that she will receive a big bonus
at the end of the year, so she goes into debt and buys a new
car right now, rather than wait until she receives the bonus.
5. Population: Demand also depends on the size and the
age structure of the population. The larger the population,
 the greater is the demand for all goods and services; the
smaller the population, the smaller is the demand for all
goods and services. Also, the larger the
proportion of the population in a given age group, the
greater is the demand for the goods and services used by
that age group.
6. Preferences/Fashions: Preferences depend on such
things as the weather, information, and fashion. For
example, greater health and fitness awareness has shifted
preferences in favor of energy bars, so the demand for
energy bars has increased.

Constant: Income, Fashions, customs, substitutes etc

Price Qd

70 5
60 10
50 15
40 20
According to this graph, when the price is 20 then Qd is 25 and when the price is
30 then the Qd is 20, so it shows that as the price increase the Qd decreases.
Similarly, when the price is 60 Qd is 5 and when the price is 50 then the Qd is 10,
thus with decrease of price the Qd increases.

Supply: It is economic term that refers to the amount of a given product or

sense that suppliers are willing to offer to the consumers at a given price level, at
a given time period.

Factors:

 Willingness
 Time period

Fixed Supply: It is consist of day-to-day goods. It is also called market

supply. e.g.: vegetables, meats, eggs, and fishes etc. It is not fixed by
demand but by the availability.
Short Term Supply: Its demand can be met by increasing the supply of
goods, which have been kept in stores.
Long term Supply: In this category there is enough time to increase supply
by hiring new labor by purchasing new machine and new material.
Joint supply: Some goods are jointly supplied like mutton and vowl. Shoes
and shoe laces. When made product then the by-product is also supplied.
Composition Supply: The supply of goods which are made from various
sources is called composition supply.
Competitive Supply: Some goods are used more than one purpose. e.g.:
Wood is used to make furniture and it is also burned to get energy. So if its
supply increases for furniture then its supply decrease for burning.
Law of supply: When the price of goods increases then supply of goods
also increases. Similarly, if the price decreases then supply of goods also
decreases.

Price Qs
10 20
15 30
20 40
Constants:

 Techniques of production
 Cost of product
 Scale of production
 Transportation cost
 Speculation in future price
 No change in Govt. Policy, taxes, and electricity costs etc.

Market Equilibrium: Equilibrium price is called market clearing price.

Because at this price exact quantity that is produced coming in the market
will be bought by the consumers.

Price Qs Qd
28 500 100
24 400 200
20 300 300
16 200 400
13 100 500
According to this graph when price is 20 then Qd and Qs value is 300 it means that
both are values are equal this condition is called Market Equilibrium.

Concept of elasticity:

Elasticity: It is a measure of variables sensitivity to a change in another variable. It

refers to the degree to which individual customers or producers change their
demand or the amount of their supplies in response to change in price or income.

Price elasticity of demand: To what extend or what degree Qd changes as a result

of change in price is called price elasticity of demand.

Measurement of elasticity of demand:

 Total outlay
method
 Percentage
proportion method
 Point and arc
elasticity method
E ¿ 1
E ¿1
E ¿1
E=1
 Price Quantity TR=P.Q
6 4 24
4 6 24
3 8 24

Here expenditures or revenue remains the same despite the change in price

E>1

Price Q TR=P.Q
6 4 24
5 6 30
4 9 36
Here expenditure or revenue of curve reacts more than the changes in the
price.
E<1

Price Q TR
6 4 24
4 5 20
2 6 12

Here total expenditure or revenue reacts less than the change in the price.
Percentage Proportion Method: Here we compare the
proportional/percentage change in a quantity demanded to the
proportional changes in price.
P r o p r t i onal c h a n g e i n d e m a n d
E=
P r o p o r t ional c h a n g e in p r ic e
∆Q ∆ P
E= ÷
Q P

E=1

Pint and Arc elasticity method:

Point Elasticity method: When there are slightest or minor changes in the
demand as a result of change in price then point elasticity method is chosen
 to measure elasticity. Because of such changes the two points on the
demand curve are so close to each other that their separate identity does
not exist so it is called point elasticity.

Price Q
2.00 400
2.01 398

This graph shows that when price is 2 then Qd is 400 and when price is 2.01 then
the Qd is 398.So there is a slightest or miner distance b/w two points on the
demand curve. So when we measure the Elasticity of demand b/w these two
points we use point Elasticity method.

Arc Elasticity method: When there are big changes in the price and Qd then two
distinctive points come into being on the demand curve, thus we chosen method
to measurement of elasticity of demand b/w these two points is called Arc
Elasticity method.

Price Q
3 6
2 8
According to graph, when the price is 3 then Qd is 6 and when the price is 2 then
the Qd is 8. So there is great difference b/w two values so we use Arc Elasticity
method for the measurement of Elasticity of demand.

Perfectly In-Elastic Demand: If the Qd is remains same of the goods regardless

change in price then goods are said to having perfectly in-Elastic demand. Their
price of elasticity of demand is zero. E.g. Insulin etc.
 This graph

shows that If price is 2 then the demand is 10 and when the price is 3 than the
demand also 10.it means that there is no effect of change in price on the demand,
which is remaining same, so it is perfectly in-elastic demand.

Perfectly Elastic Demand: If the Qd of Goods increases by a large percentage by

small change in price then the things are said to be having perfectly elastic
demand. Their price of elasticity of demand considered as infinity.e.g Gold etc.

Income Elasticity of demand: The change in demand which occurs due to change
in income or attributed to income elasticity of demand.

Income Elasticity of demand:

Q=f ( x )

∆Q q
E y= ÷
∆y y

∆Q y
¿ ∙
∆y q

∆Q y
¿ ∙
Q ∆y

∆Q ∆ y
¿ ÷
Q y
Cross Elasticity of Demand: It is concerned with that situation where the change
in demand for commodity x are influenced by change in price of commodity y.
Q x =f ( P y )

Where P y=P r i c e o f y
∆Q x Qx
E x y= ÷
∆Py P y

∆Qx Py
¿ ×
∆P y ∆ P y

∆Q ∆P y
¿ ÷
Qx Py

Price elasticity of supply: When the demand of commodity increases than the
equilibrium price also increases due to which equilibrium quantity supplied is also
increases but does the price rises by large amount and the quantity increases by a
little?

It depends on the responsiveness of the quantity supplied to a change in price. It

is called price elasticity of demand.
P e r c e nt age c h a n g e in Q s
Elasticity of supply= P e r c e n t age c h � 湵 n≥i n P

∆q ∆P
E s= ÷
q P

∆q P
¿ ×
q ∆P

∆Q P
¿ ×
∆P q