basics in economics

Business Economics also called as Managerial Economics- a branch of economics that applies the micro economic analysis to decision method of business.

Micro economics- study of individualsMacro economics- study of aggregates

1

Adam Smith (1723-1790)

Scottish philosopher and economist who is best known as the author of An Inquiry into the Nature and Causes of the Wealth Of Nations (1776), one of the most influential books ever written.

SUPPLY AND DEMAND 2

Alfred Marshal

• Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.

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Lionel Robins

• Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.

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• Microeconomics is the study of economics analyzing individual players of a market and the structure of such markets.

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• Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down", that is, using a simplified form of general-equilibrium theory.

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Demand

• Quantity demanded is the amount of a good that buyers are willing and able to purchase

• Demand is a full description of how the quantity demanded changes as the price of the good changes.

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Catherine’s Demand Schedule and Demand Curve

Copyright © 2004 South-Western

Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.

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Market Demand is the Sum of Individual Demands

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Law of Demand

• The law of demand states that – the quantity demanded of a good falls when the

price of the good rises, and vice versa, provided all other factors that affect buyers’ decisions are unchanged

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“provided all other factors … are unchanged”

• That’s an important phrase in the wording of the Law of Demand

• The quantity demanded of a consumer good such as ice cream depends on– The price of ice cream– The prices of related goods– Consumers’ incomes– Consumers’ tastes– Consumers’ expectations about future prices and incomes– Number of buyers, etc

• The Law of Demand says that the quantity demanded of a good is inversely related to its price, provided all other factors are unchanged

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Why Might Demand Increase?

• How can we explain the difference in Catherine’s behavior in situations A and B?

• Why does she consume more in situation B at every possible price?

Quantity DemandedPrice Situation A Situation B

0.00 12 200.50 10 161.00 8 121.50 6 82.00 4 62.50 2 43.00 0 2

Price

Quantity Demanded12SUPPLY AND DEMAND

Shifts in the Demand CurvePrice of

Ice-CreamCone

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

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The Law of Demand—Explanations

• There are two ways to explain the Law of Demand– Substitution effect– Income effect

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Substitution Effect

• When the price of a good decreases, consumers substitute that good instead of other competing (substitute) goods

Coke Books MoviesClothes

1. When the price of Coke decreases…

Pepsi

2. Consumption of Pepsi decreases…

3. Consumption of Coke increases

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Income Effect

• A decrease in the price of a commodity is essentially equivalent to an increase in consumers’ income

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Income Effect• Consumers respond to a decrease in the price of a

commodity as they would to an increase in income• They increase their consumption of a wide range of

goods, including the good that had a price decrease

Coke Books MoviesClothes

1. When the price of Coke decreases…

2. Consumers feel richer…

3. Consumption of Coke and other goods increases

Pepsi

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Law of Supply

• The law of supply states that, the quantity supplied of a good rises when the price of the good rises, as long as all other factors that affect suppliers’ decisions are unchanged