Introduction to Economics, Theory of Demand and Supply
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Transcript of Introduction to Economics, Theory of Demand and Supply
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L. D. COLLEGE OF ENGINEERING
RUBBER TECHNOLOGY
Sub:- engineering economics and management
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Topic:-Introduction to Economics,
Theory of Demand and Supply
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EconomicsDefinition:-
Economics word derived from two Greek words- ‘Oikos’ and ‘Nemein’.
‘Oikos’ means ‘household’‘Nemein’ means ‘Management’Management of household is
known as economics.
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Economics
Meaning of Economics:-There are many definitions by different
economists at different time, which is differ from each other.
There are classified into three categories as under;•Wealth oriented(Adam Smith,J.B.Say,J.S. Mill)•Welfare oriented( Marshall, Pigou etc)•Scarcity oriented(Robbins)
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Nature of Economics
There are four factors affecting to nature of economics as per below;
•Economics is a Science.•Economics is an Art.•Economics is Positive & Normative Science.•Economics is Micro and Macro.
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Microeconomicsversus Macroeconomics
• Microeconomics
– The study of decision making undertaken by individuals (or households) and by firms
– Like looking though a microscope to focus on the smaller parts of the economy
• Decision of a worker to work overtime or not• A family’s choice of having a baby• An individual firm advertising
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Microeconomicsversus Macroeconomics
• Macroeconomics
– The study of the behavior of the economy as a whole
– Deals with economy wide phenomena• The national unemployment rate• The rate of growth in the money supply• The national government’s budget deficit
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Microeconomicsversus Macroeconomics
• Macroeconomics deals with aggregates, or totals—such as total output in an economy.
• Modern economic theory blends micro and macro concepts.
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Law of Demand
•The law of demand expresses the nature of functional relationship b/w two variables of the demand relation viz; the price and the quantity demanded.•It simply states that demand varies inversely to change in price.•So, D=f(P)
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Application of law of Demand: Policy to Reduce Smoking
• Option #1: Raise prices of cigarettes by levying a tax
• Option #2: Introduce a public awareness program regarding ill effects of smoking
• Policy impact on substitutes• Policy impact on complements
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Supply
• The analysis of the supply of produced goods has two parts:
– An analysis of the supply of the factors of production to households and firms.
– An analysis of why firms transform those factors of production into usable goods and services.
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The Law of Supply
• There is a direct relationship between price and quantity supplied.– Quantity supplied rises as price rises, other things
constant.– Quantity supplied falls as price falls, other things
constant.
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The Supply Curve
• The supply curve is the graphic representation of the law of supply.
• The supply curve slopes upward to the right.• The slope tells us that the quantity supplied
varies directly – in the same direction – with the price.
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S
A
Quantity supplied (per unit of time)
0
Pric
e (p
er u
nit)
PA
QA
A Sample Supply Curve
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Shift Factors of Supply
• Other factors besides price affect how much will be supplied:– Prices of inputs used in the production of a good.– Technology.– Suppliers’ expectations.– Taxes and subsidies.
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Factors that Shift Supply
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Definition Of Price Elasticity Of Demand
• The change in the quantity demanded of a product due to a change in its price is known as Price elasticity of demand. Thus, the sensitiveness or responsiveness of demand to change in price is as called elasticity of demand
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A Graphical Interpretationof Price Elasticity
• For small changes in price
YΔY
QΔQ elasticity Income
Where Q is the original quantity and P is the original price
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Price Elasticity Regions along a Straight-Line Demand Curve
Quantity
Pric
e
b/2
a/2
a
b
1
1
1
ObservationPrice elasticity varies at every point along a straight-line demand curve
Inelastic
Elastic
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Income Elasticity of Demand
The income elasticity of demand is defined asthe percentage change in quantity divided bythe percentage change in income,
YΔY
QΔQ elasticity Income
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Effect Income elasticity coefficient
Classification of good
A proportionately larger change in
the quantity demanded
>1 Luxury good
A proportionately smaller change in
the quantity demanded
<1 Normal
A negative change in the quantity
demanded
<0 Inferior good
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