Industrial Economics

and Foreign Trade

HUT 300
Credits: 3

Hingston Xavier, Assistant Professor - Christ College of Engg

 Economics
• Economics originated from the Greek word
‘IOKONOMIA’ which means Household
Management
• Adam Smith ( Father of Economics) > 1776 >
‘Wealth of Nations’
• Economics studies how the society and
individuals use the limited resources to satisfy
the unlimited wants.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Business Economics
Definition
• BE is the branch of analysis which employs the
application of economic concepts, methods
and theories to solve the practical problems
faced by a business firm and to formulate
rational business decision.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Basic Economic Problems /
Central Problems in an Economy
• Basic concern : Scarcity of Resources ( Limited
Resources and Unlimited Wants)
• Basic Economic Problems or Central Problems
in an Economy as follows :
1. The Problem of Allocation of Resources.
2. The Problem of Fuller Utilization of Resources.
3. The Problem of Growth of Resources.
4. The Problem of Efficiency.
Hingston Xavier, Assistant Professor - Christ
College of Engg
 The Problem of Allocation of Resources

• The major concern pertains to

• 1. What to Produce ? ( Produce according to
the current needs of an economy)
• 2. How to Produce ? ( L or K, Depends on Price
and Availability)
• 3. For whom to Produce ? ( For society and
household)

Hingston Xavier, Assistant Professor - Christ

College of Engg
 The Problem of Fuller Utilization of
Resources
• Optimum usage of limited resources

• No wastage

• Best efficient usage of scarce resources to tap

maximum productive capacity

Hingston Xavier, Assistant Professor - Christ

College of Engg
 The Growth of Resources
• To improve the standard of living
• To achieve economic growth of an economy
• It is through Technological Advancement
where an economy increase the recourse limit
• Technology Advancement > More Growth for
an economy
The Problem of Efficiency
• Efficient usage of resources

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Scarcity and Choice
• Scarcity means that resources are not available in
the required quantity to satisfy all the wants and
needs.
• Since we face Scarcity, people have to make
choice between goods and services.
• In 1932, Lionnel Robinson ( ‘Nature and
significance of Economics’) defined economics as
a “science which studies the human behaviour in
relationship with given ends and scarce means”
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Economic Resources OR
Factors of Production
• In Economics , resources are classified into 4
1. Land (La) > Surface soil + Natural resources
2. Labour (L) > Mentally and Physically fit for
work
3. Capital (K) > All Man made aids to production
4. Organization / Enteurperneurship > Combines
all factors of production

Hingston Xavier, Assistant Professor - Christ

College of Engg
Production Possibility Curve (PPC) or
Production Possibility Frontier (PPF)
• PPC or PPF shows the various combinations of
two commodities that can be produced with
latest technology available and within given
resources utilised fully and efficiently.
Assumptions
➢Only 2 commodities
➢Latest technology
➢Fuller utilisation of resources
Hingston Xavier, Assistant Professor - Christ
College of Engg
Hingston Xavier, Assistant Professor - Christ
College of Engg
Explanation
• Any point on PPC shows fuller utilisation of
resources
• Any point above or beyond PPC > point cannot be
attained, beyond the scope
• Any point below the PPC shows the under
utilisation of resources
• PPC is downward slopping curve and concave in
shape shows resources are transferred from one
use to other use, that’s why it is known as
transformation curve.
• It is also known as production boundary or
production frontier
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Features of Production Possibility
Curve
• PPC slopes downward: Production of one
good can be increased only after sacrificing
production of some quantity of the other
good.
• PPC is concave to the origin: A production
possibility curve is concave to the point of
origin because of increasing marginal rate of
transformation (MRT) or increasing marginal
opportunity cost (MOC).

Hingston Xavier, Assistant Professor - Christ

College of Engg
• Marginal opportunity cost is opportunity cost of
good X gained in terms of good Y given up. It is
also called Marginal Rate of Transformation
(MRT).
• Concave shape of PPC means that slope of PPC
increase which implies that MRT increases.
• It means that for producing an additional unit of
a good, sacrifice of units of other good (i.e.
opportunity cost) goes on increasing.
Hingston Xavier, Assistant Professor - Christ
College of Engg
Slope of PPC is defined as the quantity
of good Y given up in exchange for
additional unit of good X

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Shift in PPC
Shift in PPC shows technological
growth in the economy

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Firm and Types
• A firm is a for-profit business organization—such
as a corporation, limited liability company (LLC),
or partnership—that provides professional
services.
Types of Firm:
• A sole proprietorship or sole trader is owned by
one person, who is liable for all costs and
obligations, and owns all assets.
• A partnership is a business owned by two or
more people; there is no limit to the number of
partners that can have a stake in ownership. A
partnership's owners each are liable for all
business obligations, and together they own
everything that belongs to the business.
Hingston Xavier, Assistant Professor - Christ
College of Engg
• Corporation: Owners of a corporation are not
liable for any costs, lawsuits, or other
obligations of the business. A corporation may
be owned by individuals or by a government..
A firm that is owned by multiple people is
often called a company.
• A financial cooperative is similar to a
corporation in that its owners have limited
liability, with the difference that its investors
have a say in the company's operations

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Firms and its objectives
The main objectives of firms are:
• Profit maximisation
• Sales maximisation
• Increased market share/market dominance
• Social/environmental concerns
• Co-operatives – Welfare oriented

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of diminishing marginal utility
Basic Concepts
Utility
The want satisfying capacity of a commodity is known as utility. It is
expressed in Utils. Utility is a cardinal concept i.e., it can be measured.
Benham formulated the unit of measurement of utility as utils.
Total Utility ( TU)
TU refers to the total satisfaction derived by the consumer from the
consumption of a given quantity of a commodity.
TUn = MU1 + MU2 + .....+ Mun

Marginal Utility (MU)

MU refers to the additional utility derived by the consumer from the
consumption of an additional unit of a commodity
MU = TU n – TU n-1
MU = d(TU)
d(Q)
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Law of Diminishing Marginal Utility Theory
(DMU) / Theory of Consumer Behaviour
• Theory has been developed by [Link]
Marshall
Assumptions of the Theory
➢ Rationality
➢ Commodities should be homogenous and normal
➢ No time gap between the consumption of goods
➢ No change in taste and preferences
➢ No change in price of the commodity
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Statement of Theory
• As the consumer consumes more and more
units of a same good, the additional utility
(MU) from each additional units goes on
decreasing.

Hingston Xavier, Assistant Professor - Christ

College of Engg
Units TU MU
Consu
med

0 0 0

1 10 10

2 18 8

3 24 6

4 27 3

5 29 2

6 29 0

7 27 -2 Hingston Xavier, Assistant Professor - Christ

College of Engg
STAGE 1 > Increasing Returns
• TU , MU increases at an increasing rate
Stage 2 > Diminishing Returns
• MU starts falling
• TU increases at a diminishing rate
• At the end of second stage , MU reaches zero
and TU reaches at its maximum (Point M )
Stage 3 > Negative Returns
• After point M, MU becomes negative
• TU starts falling
NOTE : TU moves according to MU
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Consumer Equilibrium
• According to DMU ,the consumer reaches
equilibrium when MU of last unit is equal to
price of the commodity
➢ When he consumes only one commodity
MU = PRICE
➢ When he consumes more than one
commodity ( Consumes Goods X , Y , Z) - Law
of Equi-Marginal Utility
MUx = MUy = MUz ………. MUn
Px Py Pz Pn
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Demand
• Demand is the desire backed by the ability
and willingness to pay for a commodity.
• Price is the value of a thing expressed in terms
of money.
• Demand for a commodity : it refers to the qty
of a commodity demanded in the market in a
given period of time at a given price.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Determinants of Demand /
Factors affecting Demand
• Price of the commodity ( P rises, DD falls and
vice versa )
❖Exceptional cases: Giffen goods (Essential) and
Veblen goods (Luxury)
• Income of the consumer (Y)
❖Y rises, DD rises and vice versa (Normal
Goods)
❖Y rises ,DD decreases (Inferior Goods)
❖Y increases or decreases , DD remains
constant ( Exceptional goods)
Hingston Xavier, Assistant Professor - Christ
College of Engg
• Taste and preferences of consumer

• Price of other commodity

➢Substitute goods
➢Complementary goods

• Consumer Expectations

• Size of population

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Demand Function
• It shows the functional relationship between
the demand for a commodity and factors
affecting demand is called demand function.

Dn = f( Pn, P1…Pn-1, Y , T , E , H , G …. U)

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of Demand
• Statement of Law

“Other things remains constant , the quantity

demanded of a commodity increases when it’s
price falls and decreases when it’s price rises”

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Demand Schedule
• It is the table that shows different quantities
of a commodity that would be demanded at
different prices.

Hingston Xavier, Assistant Professor - Christ

College of Engg
Demand Curve

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Exceptions to Law of Demand
• Inferior Goods
• Luxury Goods
• Life saving Goods
• Basic Necessities

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Changes in Demand
2 types of changes in demand
• Change in demand due to change in price –
Expansion and Contraction of Demand –
Movement along demand curve

• Change in demand due to factors other than

price – Increase and Decrease in demand –
Shift in demand curve
Hingston Xavier, Assistant Professor - Christ
College of Engg
Change in demand due to change in price

• Price changes and other factors remains

constant

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in demand due to factors other than price

• Other factors changes and price remains

constant

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Elasticity of Demand
• It refers to the degree of responsiveness
change in qty demanded of a commodity due
to change in price or any other factors.
• It was put forward by Alfred Marshall
• 3 Types of elasticity of demand
✓Price Elasticity
✓Income Elasticity
✓Cross Elasticity
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Price Elasticity of Demand
(ep)
• It refers to the degree of responsiveness change
in qty demanded of a commodity due to change
in price.
Types of price elasticities of Demand
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Unit elastic demand / Unitary elastic demand
4. Elastic demand / More elastic demand
5. Inelastic demand / Less elastic demand
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Perfectly Elastic Demand
• With a small change in price there would be
an infinite change in qty demanded. It is an
ideal and imaginary situation.
• Demand curve would be a horizontal straight
line parallel to x - axis
• In this case price elasticity would be infinity

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Perfectly Inelastic Demand
• With a small change in price there would be
no change in qty demanded. It exists in case of
essentials like life saving drugs.
• Demand curve would be a vertical straight line
parallel to Y - axis
• In this case price elasticity would be Zero

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Unit Elastic Demand/Unitary Elastic
Demand
• With a given change in price there would be
an equal and proportionate change in qty
demanded for the commodity. It exists in case
of normal goods.
• ep = 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
More elastic demand/ Elastic demand
• With a given change in price there would be a
more than proportionate change in qty
demanded of the commodity. It exists in case
of luxuries.
• Ep > 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Inelastic demand /Less Elastic
demand
• With a given change in price there would a
less than proportionate change in qty
demanded of the commodity. It exists in case
of necessities like food, fuel, etc.
• Ep < 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
Price elasticity of demand: Measurement
using Percentage Method

Percentage method is also called proportionate

method. The absolute value of the coefficient of
elasticity of demand ranges from zero to infinity.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Numerical Problems
• Suppose the qty demanded of a commodity
was initially 800 units at a price of 10rs and
increases to 1000 units when price falls to 8rs.
Calculate price elasticity of demand?

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Numerical Problems
• When the price of a commodity falls by 2 per unit, its
quantity demanded increases by 10 units. Its price elasticity
of demand is 1. Calculate its quantity demanded at the
price before change which was 10 per unit.
• The quantity demanded of a commodity falls by 5 units
when its price rises by 1 per unit. Its price elasticity of
demand is 1.5. Calculate the price before change if at this
price quantity demanded was 60 units.
• The market demand for a good at a price of 10 per unit is
100 units. When its price changes its market demand falls
to 50 units. Find out the new price if the price elasticity of
demand is 2.
• A consumer spends 40 on a good at a price of 1 per unit
and 60 at a price of 2 per unit. What is the price elasticity of
demand? What kind of good it is? What shape its demand
curve will take? Hingston Xavier, Assistant Professor - Christ
College of Engg
 Supply
• Supply refers to the quantities of a commodity
which a seller offers for sale at a particular
price in a given period of time.
• It refers to the desired qty of commodity that
the seller offer for sale in the market.

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Factors affecting Supply
• Price of the commodity ( P rises SS rises)
• Goals of the firm
• Price of other commodities
• Price of factors of production
• State of technology
• Government Taxation

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Supply function
• It shows the functional relationship between
supply and factors affecting the supply

Sn = f(Pn, Pn...Pn-1, Gf, T, E, Gt, N….U)

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Law of Supply

‘Other things remains constant, the quantity

supplied increases with rise in price of the
commodity and quantity supplied decreases
with fall in the price of the commodity’

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Supply Schedule
• It is a table shows the amounts of a
commodity supplied at a given period of time
at various prices

Hingston Xavier, Assistant Professor - Christ

College of Engg
Supply Curve

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Changes in Supply
2 types of changes in Supply
• Change in supply due to change in price –
Expansion and Contraction of supply –
Movement along supply curve

• Change in supply due to factors other than

price – Increase and Decrease in supply – Shift
in supply curve
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Change in supply due to change in price

• Price changes other factors remains the same

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Change in supply due to factors other
than price
• Other factors changes and price remains the
same

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Elasticity of Supply (Es)
• It refers to the degree of responsiveness change
in qty supplied of a commodity due to change in
price or any other factors.
• We have only price elasticity under Elasticity of
Supply ( Es)
1. Perfectly elastic supply
2. Perfectly inelastic supply
3. Unit elastic supply / Unitary elastic supply
4. Elastic supply / More elastic supply
5. Inelastic supply / Less elastic supply
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Perfectly elastic supply

• With a small change in price there would be

an infinite change in qty supplied.
• Supply curve would be a horizontal straight
line parallel to x - axis
• In this case price elasticity would be infinity

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Perfectly Inelastic supply
• With a small change in price there would be
no change in qty supplied.
• Supply curve would be a vertical straight line
parallel to Y - axis
• In this case price elasticity would be Zero

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Unit elastic supply / Unitary elastic
supply
• With a given change in price there would be
an equal and proportionate change in qty
supplied for the commodity
• es = 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
Elastic supply / More elastic supply
• With a given change in price there would be a
more than proportionate change in qty
supplied of the commodity.
• Es > 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Inelastic supply / Less elastic supply
• With a given change in price there would a
less than proportionate change in qty supplied
of the commodity.
• Es < 1

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Equilibrium Price & Quantity
• Equilibrium is a position or situation from which
there is no tendency to change. It is a state of
balance or rest.
Equilibrium Price
Qd = Qs
it is the price at which qty demanded of a
commodity equals to the quantity supplied of the
commodity
Thus demand and supply is known as Invisible
hands of the market

Hingston Xavier, Assistant Professor - Christ

College of Engg
Determination of Equilibrium Price and Quantity

Hingston Xavier, Assistant Professor - Christ

College of Engg
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Effects of changes in demand and
supply on equilibrium price
• Increase in Demand
• Decrease in Demand.
• Increase in Supply
• Decrease in supply

Hingston Xavier, Assistant Professor - Christ

College of Engg
• Suppose the demand function of a particular
commodity for the year 2006 is given by
Qd = 1000 – P and supply function is given as
Qs = 100 + 4P.
• Find equilibrium price & qty
• What is the excess demand or excess supply
when price is a.) 500 b.) 100

Hingston Xavier, Assistant Professor - Christ

College of Engg
• Given the following demand and supply
functions of a particular commodity . Find the
equilibrium price and quantity ?
• Qd =100 – P
• P = 10 + 2Qs
Solution:
Qd = Qs

Hingston Xavier, Assistant Professor - Christ

College of Engg
 Consumer Surplus

• Consumer surplus is defined as the difference

between the consumers' willingness to pay for a
commodity and the actual price paid by them.
• A surplus occurs when the consumer’s willingness
to pay for a product is greater than its market
price.
• Consumer surplus always increases as the price
of a good falls and decreases as the price of a
good rises.
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Producer Surplus

• Producer surplus is the difference between

how much a person would be willing to accept
for given quantity of a good versus how much
they can receive by selling the good at the
market price.
• The difference or surplus amount is the
benefit the producer receives for selling the
good in the market

Hingston Xavier, Assistant Professor - Christ

College of Engg
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Taxation
• Taxation is the means by which a government or
the taxing authority imposes or levies a tax on its
citizens and business entities.
• Taxation refers to the practice of government
collecting money from its citizens to pay for
public services.
• A tax is a mandatory fee or financial charge levied
by any government on an individual or an
organization to collect revenue for public works
providing the best facilities and infrastructure.
Hingston Xavier, Assistant Professor - Christ
College of Engg
 Deadweight Loss
• A deadweight loss is a cost to society created
by market inefficiency, which occurs
when supply and demand are out of
equilibrium.
• A deadweight loss is the irrecoverable
reduction in economic efficiency that occurs
when a free-market equilibrium is disturbed
by a market intervention or other shock to
supply and/or demand.

Hingston Xavier, Assistant Professor - Christ

College of Engg