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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