ANTIM PRAHAR

The Most Important Questions

By
Dr. Anand Vyas
1 Micro Economics and Macro
Economics
Microeconomics is the social science that studies the implications of
human action, specifically about how those decisions affect the
utilization and distribution of scarce resources. Microeconomics shows
how and why different goods have different values, how individuals
make more efficient or more productive decisions, and how individuals
best coordinate and cooperate with one another. Generally speaking,
microeconomics is considered a more complete, advanced, and
settled science than macroeconomics.

Macroeconomics is a branch of economics that studies how the

aggregate economy behaves. In macroeconomics, economy-wide
phenomena are examined such as inflation, price levels, rate of
economic growth, national income, gross domestic product (GDP),
and changes in unemployment.
2 Cardinal Utility and Ordinal
Utility
Utility Analysis
• Utility is a term in economics that refers to the total satisfaction
received from consuming a good or service. Economic theories based
on rational choice usually assume that consumers will strive to
maximize their utility.
Cardinal Utility and Ordinal Utility
Cardinal Utility is the idea that economic welfare can be
directly observable and be given a value. For example, people
may be able to express the utility that consumption gives for
certain goods. For example, if a Nissan car gives 5,000 units of
utility, a BMW car would give 8,000 units.

In ordinal utility, the consumer only ranks choices in terms of

preference but we do not give exact numerical figures for
utility. For example, we prefer a BMW car to a Nissan car, but
we don't say by how much. It is argued this is more relevant in
the real world.
3 Law of Demand and Exceptions
Law of Demand
The law of demand states that the
quantity purchased varies inversely
with price. In other words, the higher
the price, the lower the quantity
demanded. This occurs because of
diminishing marginal utility.
Exceptions to the law of Demand
• The three exceptions to the law of Demand are Giffen goods, Veblen
effect, and income change.
• A Giffen good is a low income, non-luxury product for which demand
increases as the price increases and vice versa. (Salt, Bajra)
• Veblen goods are typically high-quality goods that are made well,
are exclusive, and are a status symbol. (Apple Phone)
4 Laws of Diminishing Returns

The law of diminishing marginal

returns states that in any
production process, a point will
be reached where adding one
more production unit while
keeping the others constant will
cause the overall output to
decrease.
5 Cost Concept and Analysis:
Costs, Types of costs
• Cost, in common usage, the monetary value of goods and services
that producers and consumers purchase.
Types of costs
1. Fixed Costs (FC) The costs which don't vary with changing output.
2. Variable Costs (VC) Costs which depend on the output produced.
3. Semi-Variable Cost.
4. Total Costs (TC) = Fixed + Variable Costs.
5. Marginal Costs – Marginal cost is the cost of producing an extra
unit.
6 Kinked Demand Curve

A kinked demand curve occurs when the

demand curve is not a straight line but has a
different elasticity for higher and lower prices.
The kinked demand curve suggests periods of
price stability or price stickiness between
rival firms. The kinked demand curve is a
graphical representation of the price-quantity
relationship in an oligopoly, a market structure
characterised by a small number of firms that
are able to influence the market price.
7 Perfect and Imperfect Market
Structures
Market structures
• Market structure, in economics, depicts how firms are differentiated
and categorised based on the types of goods they sell and how their
operations are affected by external factors and elements. Market
structure makes it easier to understand the characteristics of diverse
markets
Perfect Market Structure
Perfect competition is a concept in microeconomics that describes a
market structure controlled entirely by market forces. If and when
these forces are not met, the market is said to have imperfect
competition. While no market has clearly defined perfect
competition, all real-world markets are classified as imperfect.
Perfect Competition and features
•The main features of perfect competition are as follows: Many Buyers
and Sellers – There will always be a huge number of buyers and sellers
in this form of marketplace. The advantage of having a large number of
small-sized producers is that they cannot combine to influence the
market price.
Imperfect Market Structures
Monopolistic competition: This is a situation in which many firms compete with slightly
different goods. The costs of production are above what perfectly competitive companies
can achieve, but society benefits from the distinction of the products.

Monopoly: A corporation that has no competition in its business. A monopoly company

produces less production, has higher costs, and sells its product at a price higher than the
price if it were limited by competition. Such adverse outcomes create oversight by the
government in general.

Oligopoly: This is a market with only a few firms. They form a cartel to reduce production
and boost profits in the way a monopoly does. It includes duopoly, which is a particular
oligopoly type, with only two firms in one industry.

Monopsony: A single-buyer market and many sellers.

Oligopsony: A market with few buyers and many sellers.
Duopoly
8 Inflation: Types and Causes
Inflation is the rate of increase in prices over a given period of time.
Inflation is typically a broad measure, such as the overall increase in
prices or the increase in the cost of living in a country.

Inflation is sometimes classified into three types: Demand-Pull

inflation, Cost-Push inflation, and Built-In inflation. The most
commonly used inflation indexes are the Consumer Price Index (CPI)
and the Wholesale Price Index (WPI).
Inflation causes
1. Demand-pull inflation. Demand-pull inflation happens when the
demand for certain goods and services is greater than the
economy's ability to meet those demands.
2. Cost-push inflation.
3. Increased money supply.
4. Devaluation.
5. Rising wages.
6. Policies and regulations.
9 Circular flows in 2 Sector, 3
Sector, 4 Sector economics
10 Oligopoly Features
• A Few Firms with Large Market Share.
• High Barriers to Entry.
• Interdependence.
• Each Firm Has Little Market Power In Its Own Right.
• Higher Prices than Perfect Competition.
11 Elasticity of Demand and its
Types
• An elastic demand is one in which the change in quantity demanded
due to a change in price is large. An inelastic demand is one in which
the change in quantity demanded due to a change in price is small.
The formula for computing elasticity of demand is: (Q1 – Q2) / (Q1 +
Q2)
•
Price Elasticity,
•Price elasticity of demand is a measurement of the change in
consumption of a product in relation to a change in its price
Income Elasticity,
Cross Elasticity
• Cross elasticity of demand refers to the way that changes in the price
of one good can affect the quantity demanded of another good. This
relationship can vary depending on whether the two goods are
substitutes, complements, or unrelated to each other.
12 Managerial Economics and its
Relevance in Business Decisions
To quote Mansfield, “Managerial economics is concerned with the
application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions.

• Useful in Business Organization

• Help in Business Planning
• Helpful in Cost Control
13 Cartels
• A cartel is a grouping of producers that work together to protect their
interests. Cartels are created when a few large producers decide to co-
operate with respect to aspects of their market. Once formed, cartels can
fix prices for members, so that competition on price is avoided. In this case
cartels are also called price rings. They can also restrict output released
onto the market, such as with OPEC and oil production quotas, and set
rules governing other aspects of the behaviour of members. Setting rules is
especially important in oligopolistic markets, as predicted in game theory.
A significant attraction of cartels to producers is that they set rules that
members follow, thus reducing risks that would exist without the cartel.
•
14 Economics Fundamentals
• Basic Concept
• Economics is the study of scarcity and its implications for the use of
resources, production of goods and services, growth of production
and welfare over time, and a great variety of other complex issues of
vital concern to society.
Nature and Scope of Economics
Economics is regarded as a social science because it uses scientific
methods to build theories that can help explain the behaviour of
individuals, groups and organisations. Economics attempts to explain
economic behaviour, which arises when scarce resources are
exchanged