ByCurrenc-I Club, IIM Indore

Aditya | Arjit | Priyadarshini | Sandesh |

� The two major divisions are Macro and Micro Economics

� Macro : Provides a holistic view about the economy that covers GDP, Inflation, Monetary and fiscal policies, Unemployment, BOP ( balance of payment) and growth rate of the balance of payment) and growth rate of the economy etc.

� Micro : Analyses the individual decision making units which covers the factors that affect the demand and supply, prices of the goods and elasticity etc.

Demand & Supply

� Demand- Quantity expected to be purchased by consumers at different price levels

� Supply- Quantity supplied by the industry at different price levelsAs the price of good increases demand � As the price of good increases demand falls (consumers do not prefer the good due to high price) and supply increases (manufacturers gets more revenue due to increased price)

� Hence demand is a downward sloping and supply is an upward sloping curve

� Equilibrium level is given by the point of intersection and the corresponding price is equilibrium price

� Elasticity is a measure of ratio of percentage change in one variable to percentage change in other variable

� Price Elasticity – Measures change in quantity demanded in response to change in price of the good ◦ Price Elasticity = ΔQ(%age Change in Demand) / (ΔP %age change in Price)

� Income Elasticity- Measures percentage change in quantity demanded due to change in incomequantity demanded due to change in income◦ Income Elasticity = ΔQ(%age Change in Demand) / ΔI(%age change in

Income)

� Note- The above quantities measure price and income elasticity of demand. Similarly there can be elasticity of supply where the numerator is replaced with change in quantity of supply.

� The demand is perfectly elastic at price $15

� At any other price point demand is zero

This is an example of � This is an example of perfectly elastic demand curve

� The curve is also called infinitely elastic curve

� This curve represents perfectly inelastic or zero elastic demand curve

� The curve shows that the demand remains at a particular quantity the demand remains at a particular quantity irrespective of the price level

� The same can be applied for the supply side curve E.G. There can be perfectly inelastic supply curve

� There are four different types of markets◦ Perfectly competitive

◦ Monopoly

◦ Monopolistic competition

◦ Oligopoly◦ Oligopoly

� There are many players with each one holding a small market share

� There are no entry and exit barriers i.e. It is easy to enter and exit the business

� All the products produced by different manufacturers are identicalAll the products produced by different manufacturers are identical

� Prices are determined by demand and supply of the product, not by the firm

� Perfectly competitive firms have perfectly elastic demand curve

� There is one supplier in the entire market who produces a product which is exclusive and has no good substitutes

� The barriers to entry are very high◦ Legal Barriers◦ Natural Barriers◦ Natural Barriers

� Patents copyrights and government franchisees are few legal barriers

� Natural Barriers- A firm can reduce the cost of production by producing more (Economies of Scale) and they sell at a cheaper price which cannot be done by other players

� Large number of competitors produce differentiated products

� Product differentiation gives degree of market power to each firm

� Firms compete on price quality and marketing due to product differentiation. Quality is a Firms compete on price quality and marketing due to product differentiation. Quality is a significant product differentiation characteristic and price is set by the firms based on the demand supply relation

� Barriers to entry and exit are low and hence it is easy to enter and exit the business

� The market is characterized by small number of sellers

� There is interdependence amongst the sellers and hence decision by player is affected by other player’s decisionsplayer’s decisions

� Products may be differentiated or similar

� Significant barriers to entry due to which each firm has large economies of scale. Due to significant barriers of entry there are very few players who supply the entire market hence they have large economies of scale

GDP

• Total Market value of all final goods and Services produced within

an economy

• Check out GDP/NDP/GNPCheck out GDP/NDP/GNPCheck out GDP/NDP/GNPCheck out GDP/NDP/GNP

• Rate of changes in price

Inflation

• Rate of changes in price

• Find out the two main indexes for inflation measurementFind out the two main indexes for inflation measurementFind out the two main indexes for inflation measurementFind out the two main indexes for inflation measurement

Interest Rates

• Real interest rate is the rate at which your money grows after

accounting for inflation

• Find out the difference between Real and Nominal Interest ratesFind out the difference between Real and Nominal Interest ratesFind out the difference between Real and Nominal Interest ratesFind out the difference between Real and Nominal Interest rates

� Revenue Deficit: Revenue Expd – Revenue Receipts

� Fiscal Deficit: Total Expd – ( Revenue Receipts+ Recovery of loans + Receipts from PSU disinvestment)PSU disinvestment)

� Primary deficit: Fiscal Deficit- Interest Payments

� Government and RBI uses various tools to influence the growth of the economy

� Monetary policy (RBI)1. Control money supply2. Control interest rates

Fiscal policy� Fiscal policy1. Manage the government revenue

2. Manage government expenditure

� Find Find Find Find out: out: out: out: <CRR<CRR<CRR<CRR, Repo rate, reverse repo, , Repo rate, reverse repo, , Repo rate, reverse repo, , Repo rate, reverse repo, SLR>SLR>SLR>SLR>

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