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    Add as FriendMicroeconomics Introduction

    by: SABU

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    1 : Introduction
    2 : What is Economics?
    3 : Text Book Definitions "Economics is the study of people in the ordinary business of life." Alfred Marshall (1890) Principles of economics; An introductory volume. Economics is the "study of how societies use scarce resources to produce valuable commodities and distribute them among different people." Paul A. Samuelson (1948) Economics.
    4 : Knowledge of Economics, helps to allocate scarce resources most efficiently.
    5 : Opportunity Cost is the cost of next best alternative forgone. Every action has an opportunity cost. Someone who invests in a stock denies oneself the interest that one can earn by leaving the money in savings account instead.
    6 : What is the opportunity cost of going to the movies?     - The cost of the clothes that you wore to the movies.  - The time you spent choosing the movie you watched.  - The cost of buying the ticket and the time spent at the movie. . - All of the above.
    7 : Why economists never come to a conclusion?
    8 : “If you took all of the economists in the country and laid them end to end, they'd never reach a conclusion.” George Bernard Shaw
    9 : Positive economics: - scientific (testable). - focuses on value-free descriptions and predictions about economic relationships. - evaluate policies by how well they accomplish the goals. - cannot determine whether any goal is good or bad. “Will the unemployment rate increase if the minimum wage is raised?”.
    10 : Normative economics: - deals with values. - addresses what should be rather than what is. For example, the statement, “Should we provide unemployment wages,” implies a value judgment.
    11 : Microeconomics (individual units: households, firms etc.) Economics Macroeconomics (economy as a whole: inflation, interest rates etc.)
    12 : Economics Helps to understand Society. To understand Global Affairs. To be Informed Voters. Many political issues put before citizens for a vote embody economic issues.
    13 : Relevance of the Course: To understand basic principles of microeconomics, focusing on economic concepts and analysis that are useful in decision-making by individuals and firms in markets. Valuable tool for analyzing business situation (say) -Why some software firms spend millions on software development but permit consumers to download it for free?
    14 : To understand consumer preferences and trade offs. To predict demand and its responsiveness to price. To introduce strategies to minimize cost and maximize output. To understand pricing strategies. To make investment decisions under certainty and uncertainty. To assess the impact of govt. policies etc.
    15 : What are the different types of economic resources?
    16 : Land – rent Labor – wages Capital – interest Entrepreneur - profit
    17 : What are the main problems of an economy?
    18 : What to produce? (allocation of resources) How to produce? (selection of technology) For whom to produce? (distribution of output)
    19 : What are the different types of economy?
    20 : Economy classification is based on the systems by which nations allocate their resources to solve the problems of an economy. Command Economy (central planning) - It has strong government control. - government decide how the country's resources would best allocated
    21 : Market Economy (capitalism) - Very little government control. - "invisible hand", determines how resources should be allocated. - consumer sovereignty reigns. Mixed Economy: Both Capitalism and Socialism. Laissez-faire: government should not intervene in economic matters, except some public goods.
    22 : Define Market. Define Economic good. Define Price. Define Nominal vs Real price. Define Production.
    23 : Market is the interaction of buyers and sellers or a place where exchange takes place. An economic good has following characteristics: - It has utility - It is scarce and - It is transferable.
    24 : Price: Monetary value assigned to economic good. Nominal Price: Absolute price of a good, unadjusted for inflation. Real price: Price of a good adjusted for inflation. Production: Transformation of inputs into final goods and services.
    25 : Why diamond is costly than water?
    26 : What determines the value of a good? Adam smith in the 1760s pointed out this paradox. Answer to this paradox had to wait for 100 years until the marginal utility revolution in 1870s. Karl Marx and David Ricardo (Supply Side Economists). - For them value depended on the amount of resources used in producing a good. - This could be further reduced to the amount of labor time embodied in the good. - The more the labor , the more valuable would the good be.
    27 : Other economists looked at the demand side (John Maynard Keynes) . William Stanley Jevons (1835-82) in England, Carl Menger (1840-1921) in Austria, and Leon Walras (1834-1910) in Switzerland all independently claimed that the source of the market value of a good was its marginal utility, not its total utility.
    28 : The answer has to do with both the marginal utility (demand side) and scarcity (supply side). Marginal utility is the additional satisfaction obtained from consuming an additional unit of a good. Water has high total utility but low marginal utility. Diamond has low total utility but high marginal utility.
    29 : Why do rich countries become richer ?
    30 : Production Possibility Frontier (PPF) explains this. PPF shows the maximum feasible amount of one commodity for any given amount of another commodity, ceteris paribus. All points on PPF are points of maximum productive efficiency. It is impossible to increase the output of one commodity without reducing the output of the other.
    31 : Food Computers Inside the PPF: productivity inefficient points D: impossible points F1 F2 C1 C2 B A U
    32 : COMPUTERS FOOD Oppurtunity cost between 5 & 6 computers is 1 Food units Oppurtunity cost between 9 & 10 computers is 3 Food units 11 10 8 5 Q R T V 5 6 9 10
    33 : Slope of the PPF - Marginal Rate of Transformation (MRT). It is also called as "opportunity cost”. Opportunity cost here measures how much an additional unit of one good costs in units forgone of the other good. PPF is concave downward to represent increasing opportunity cost with increased output of a good. At first, the least qualified workers move so very little impact on the opportunity cost of increasing computer production. This cost of successive units will increase as more of specialised food manufacturers are attracted.
    34 : If the technology improves or the supplies of factors of production increase, the PPF curve shifts to the right (upward), raising the amount of each good that can be produced. Rich countries invest more in R&D so their shift in PPF is higher. This implies given resources they can produce more.
    35 : What do we understand by equilibrium?
    36 : Equilibrium Partial Equilibrium - individual markets in isolation. -determination of equilibrium prices and quantities in a market independent of effects from other markets. But markets are often interdependent. Conditions in one can affect prices and outputs in others either because one good is an input to the production of another good or because two goods are related.
    37 : General Equilibrium: - economy as a whole. - simultaneous determination of the prices and quantities in all relevant markets taking into account all effects of changes in price in one market over others. Both types of equilibrium analysis are useful, each being valuable in its own way.
    38 : How do market functions?
    39 : Demand Demand is the willingness to buy supported by purchasing power. Law of demand: ceteris paribus, higher the price, lower the demand and vice versa.  Demand curve shows the inverse relationship between the demand and the price of that particular product.
    40 : A B C Demand Relationship Demand (D) Price Q1 Q2 P3 P2 P1 Q3 Movement along the curve: shift in the quantity demanded due to a change in its price. Quantity demanded
    41 : Change in the demand curve 1 2 3 4 5 10 20 30 40 50 60 Quantity demanded price D2 D1
    42 : Shift/change in the demand curve - income - prices of related goods - consumers preferences, - expectation of a price change. etc.
    43 : Related goods are substitutes or complementary goods. Substitutes: An increase in price of one good leads to an increase in the quantity demanded of the other. E g. Tea and coffee; copper and aluminium. Complements: An increase in price of one good leads to a decrease in the quantity demanded of the other. Eg. Car and Petrol.
    44 : Supply Supply is the producers/suppliers willingness to sell at different prices. Law of supply: ceteris paribus, higher the price, higher the quantity supplied and vice versa.  Supply curve shows the directly proportional relation between price and quantity supplied of that particular product.
    45 : Supply Relationship Supply (S) Quantity Price P3 P2 P1 Q1 Q2 Q3 Movement along the curve implies shift in the quantity supplied due to a change in its price.
    46 : Shift/change in the supply curve due to other factors. eg., change in production cost like price of raw materials, wages, technological innovations, interest charges, improvement in managerial skills etc. 1 2 3 4 5 10 20 30 40 50 60 Quantity supplied price S2 S1
    47 : Shift/change in the supply curve - change in production cost like price of raw materials, wages - technological innovations - interest charges - improvement in managerial skills etc.
    48 : Market Equilibrium Surplus Shortage D S Quantity Price P1 P0 P2 Q0
    49 : Market is in equilibrium at the intersection of demand and supply curves. Market mechanism: Price changes until the market clears. Price is the invisible hand in the market. This happens only in a competitive market.
    50 : Change in market equilibrium (due to shifts in demand and supply) Quantity D D’ S S’ P1 P2 Price 0 Q1 Q2
    51 : Why increase in demand not necessarily ends in price rise?
    52 : Demand for most natural resources has increased dramatically, but the real prices have risen only slightly because cost reductions have shifted the supply curve to the right just as dramatically. In general, changes in price and quantity depend on the extent of the curve shifts and the shape of each curve. Shape of the curves depends on Elasticity.
    53 : Thank You

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