Introduction
Economics
Greek Words
Oikos
+
Nomos
Oikonomia
Meaning -
“ Household Management ”
or
“ Management of State”
Definition of Economics
 Economics has been variously defined by different economists
from time to time.
 This is partly because “ economics is an unfinished science”
(F. Zuethen, Economic Theory & Method,1953)
 J.N.Keynes says – “Political Economy is said to have
strangled itself with definitions” (Scope & Method of Political
Economy)
 Classical definitions of Economics are grouped together under
3 heads:1. Wealth Definition (Adam Smith)
2. Welfare Definition (Dr. Alfred Marshal)
3. Scarcity Definition (Lionel Robbins)
Adam Smith
(Economics is a Science of wealth)
 Book :- “An Enquiry into the Nature and Causes of the Wealth of
Nations” (1776)
 Definition :- “Economics enquires into the factors that determine wealth
of the country and its growth”.
“The great object of Political Economy of every country is to increase
the riches and power of that country”.
 Subject matter of the book : Wealth and Riches of a country cannot grow without the proper utilization of
its resources.
 Production and Expansion of Wealth.
Wealth Definition (Continues…..)
 David Ricardo (Principles of Political Economy) shifted the emphasis from the
production of wealth to the distribution of wealth.
Definition - “The produce of the Earth (all that is derived from its surface) by the
united application of Labour, Machinery & Capital is divided among three
classes of the community, namely The proprietor of the Land
 The owner of the stock of Capital necessary for its cultivation
 The Labourers by whose industry it is cultivated.”
 He further writes – “To determine the laws which regulate this distribution, is the
principle problem in Political Economy”.
 John Stuart Mill – “ The Political Economy is science of the production and
distribution of wealth.”
 J. B. Say (French Economist) – “Economics is the Science which treats of
wealth.”
 F. A. Walker (Political Economy,1883) – “Economics is the name of that part of
knowledge which relates to wealth.”
Critical Evaluation of “Wealth Definition”
In defense
Critics
Carlyle & Ruskin – Gospel of Mammon / Pig
Science / Dismal Science.
a)
Production, exchange & distribution of wealth
gives physical substance to men & their standard of living.
b)
Determine income, employment
& economic growth.
Study material wealth & ignores immaterial services(services of teachers, doctors, musicians, dancers
etc)
Describes only productive factors like-land, labour & regard immaterial services as unproductive.
Emphasis on wealth & put man on secondary
place.
Don’t stress on man’s behaviour & neglects
promotion of human & social welfare.
Classical economists emphasis on institution of private property as legally, morally & naturally
just. i.e.- right of wealth or natural rights of the factors of production on their several shares.
Natural & moral basis of property rights is not accepted by modern economists. Property are
conferred by society and vested in the name of society.
Welfare Definition
 Dr. Alfred Marshal (Principles of Economics, end of 19th century) –
“Political Economy or Economics is the study of mankind in the ordinary
business of life; it examines that part of individual & social action which is
most closely connected with the attainment & with the use of the material
requisites of well-being.”
 So according to him- “Economics is on the one side a study of wealth; and
on the other, and more important side, a part of the study of man.”
So there are 3 things worth of noting: 1 Social Science- It is study of man as such and not only wealth.
 2 Economic Aspect – It is concerned with a particular aspects of man’s life
(study of man’s action in the ordinary business of life; i.e.:- How he gets
income and how he uses it.)
 3 Welfare – The primary object and end of Economics is the promotion of
material welfare; not totally welfare or spiritual well-being but part of
material well being. So goal is described there.
Other Economists who supported the welfare definitions are E. Cannan
 A. C. Pigou
Critical Evaluation of Welfare definition
1.
2.
Restricted only to the material welfare or material things.
Concept of welfare is not fixed and definite- i.e.- why welfare /
Economics is not all about welfare.
Scarcity Definition (Lionel Robbins’ Definition)
 Book – “An Essay on the nature & Significance of Economic Science.”
(Published in 1931)
 Definition- “Economics is the science which studied human behavior
as a relationship between ends and scarce means which have
alternative uses.”
 So Economics is a science of choice.
There are 3 things in the definition1. Unlimited wants / Multiplicity of wants
2. Scarce means / Scarcity of means
3. Alternative uses of means.
Critical Evaluation of Robbins Definition
1. Robbins opposes the concept of social welfare
2. Robbins criticized on that Economics neutral
between ends.
3. Robbins criticized making Economics human
science instead of social science.

My personal definition “Economics is social science which deals with
mankind in economic way and better utilization
of resources to meet human wants so that social
welfare and nation’s growth are achieved.”
Subject Matter of Economics:Types of Economics :1. Micro Economics
2. Macro Economics
Micro Economics – It studies the economic action
and behavior of individual units and small groups
of individual units.
Product
Pricing
Micro
Economic
Theory
Factor
Pricing
(Theory of
Distribution)
Theory of
welfare
Macroeconomics
Makros (meaning = Large) + Nomos (science)
Definitions- “Macroeconomics analysis the
behavior of the whole economic system in the
totality or entirety”.
“Macroeconomics studies the behavior of the
large aggregates such as total employment,
the national product or Income, the general
price level of the economy”.
Macroeconomics is also known as aggregate
economics.
Subject Matter of Macroeconomics
• Macroeconomic Theory
Theory of Income
& Employment
Theory of
consumptio
n function
Theory of general
price level &
Inflation
Theory of
Economic
Growth
Theory of
Investment
Theory of Fluctuations(Business cycle)
Macro Theory of
Distribution(
Relative shares of
wages & Profits)
Demand & Law of Demand
 Utility – “Utility means want satisfying power of a
commodity”.
 It is also defined as – The amount of satisfaction which
a person derives from consuming a commodity.”
There are 2 dimensions to it:
 Total utility: Total amount of satisfaction
 Marginal Utility: Additional satisfaction derived from
consuming an additional unit of the product.
 Demand – “The demand for a commodity is the
amount of it that a consumer will purchase or will be
ready to take off from the market at various given price
in a period of time.”
Law of Demand
• “ Other things being equal / constant, if price
of a commodity falls ,the quantity demanded
of that product will rise and Vice-versa.
• So According to law of Demand – There is
inverse relationship between price and
quantity demanded
• .Demand shedule & Demand Curve
P
Price in Rs.
Quantity Demanded in
unit
12
10
10
20
8
30
6
40
r
i
c
e
Quantity
Factors influencing Demand
(Determinants of Demand)
Taste and preferences of the consumers
Incomes of the people
Changes in the price of the related goodsSubstitutes goods- exampleComplementary goods – example-
Tea & Coffee
Computer & Laptops
Milk & Milk products
Car & Petrol
Number of consumers in the markets (Population of
state)
Changes in propensity to consumes
Consumer’s expectations with regard to future prices
of that goods
Income distribution
Law of Demand (continued…..)
So according to law of demand- Quantity
demanded is functions of followingQd = f (Px , I, Pr, T, A, ………..)
Where
• Qd= quantity demanded of a goods
• Px = price of that goods
• I = Income of people
• Pr = Price of related goods
• T = Tastes and preferences
• A= Advertisement
Exceptions to Law of Demand
• Veblin Effects / Veblin Goods- Theory given by
Thorstein Veblin for prestige goods.
• Giffen Goods – Theory given by Sir Robert
Giffin , for inferior goods.
• Demand of necessity- example- Salt
• Scarcity or Inflection
• Natural calamities
Movement of Demand curve
1.Extension and contraction in demand
(movement is along the same curve in both the directions: upward and
downward, only price is changing other things remaining the same)
2.Increase and decrease in demand
(there is a shift in the demand curve due to change in the determinants of
demand other than price)
• Market Demand:
• Market demand is the amount demanded of a commodity at different
price levels. In brief we can say the market demand is the sum of
individual demands for a product at a price per unit of time. Therefore
quantity demanded of a commodity by an individual per unit of time, at a
given price, is known as ‘Individual Demand’ for that commodity. The
aggregate of individual demands for a product is called market demand
for the product.
18
Example is given below for market demand: Below table explains the
demand for commodity X by different consumers at different price level. How
we will calculate the market demand for commodity X
PRICE & QUANTITY DEMANDED ---- Demand curve of A, B, C & Market
Price of
X
Quantity of X
demanded by
various
Individuals
Market
Demand
A
B
C
10
5
1
0
6
8
7
2
0
9
6
10
4
1
15
4
14
6
2
22
2
20
10
4
34
1
27
15
8
50
A demand
Total market
demand
19
•
Types of Demand
•
1. Price Demand
•
2. Income Demand
•
3. Cross Demand
•
Elasticity of Demand
(Quantum of changes / Degree of responsiveness / Sensitivity)
•
•
Dr. Alfred Marshall has put the concept of Elasticity. He defined Elasticity of demand as the
extent to which the quantity demanded of a commodity changes in response to a given
change in price. Dr. Marshall first limited this concept only to effect of price and demand,
but later he has expanded the area to Income and Cross-relationship of demand with these
factors.
According to Marshall there are 3 types of elasticity they are:
•
Price Elasticity of Demand: It measures the effect of a change in the price of Y on the
demand of Y
•
Income Elasticity of Demand: Effect of a change in consumer’s income on the demand for
product X or Y or any other product.
•
Cross Elasticity of Demand: Effect of a change in the price of Y product on the demand of X
20
PRICE ELASTICITY OF DEMAND


Price elasticity of demand indicates the degree of responsiveness of quantity
demanded of a goods to the change in its price
Price elasticity of demand is defined as the ratio of the percentage change in
the quantity demanded of a commodity to a percentage change in the price of
that goods.

Dr. Marshall defined the concept of price elasticity as “ The elasticity of demand
in market is great or small according as the amount demanded increases much
or little for a given fall in the price, and diminishes much or little for a given rise
in the price”
•
Ep =
•
The price and demand is having inverse relationship between them, therefore the
numerator or denominator will be negative. As such Ep will always be a negative quantity.
As it is always negative minus sign generally omitted. Example if price falls by 1% and the
demand increases by 3%. The Ep = 3% = - 3. so Ep is 3 and (-)ve sign omitted.
-1%
21
% Change in quantity Demand ed
% Change in Price
•
•
•
•
So
Ep
Ep
Ep
•
(A) Types of Price Elasticity:
•
Perfectly Elastic Demand:
•
Perfect elasticity of demand refers to that situation where slightest rise in price
causes the quantity demanded of the commodity to fall to zero and contrary
slightest fall in price increase in the quantity demanded of the commodity. The
demand is hypersensitive and the elasticity is infinity.
•
Example: 5% increase in demand for no change in price
when
>1
Elastic Demand
< 1
Inelastic Demand
= 1
Unitary elastic demand
Y
Ep = 5 = ~.
0
Price
D
D1
O
X
Q
Q1
Demand
22
2. Perfectly Inelastic Demand:
Y
Ep = 0 = 0.
5
Price
D
P1
P
O
X
D1
Demand
Perfect inelastic demand refers to that situation where any rise in price does not cause
any change in the quantity demanded of the commodity. The demand is insensitive and
the elasticity is zero
23
3. Highly Elastic Demand:
Y D
Ep = 40 = 2.
20
Price
P
Demand Curve
P1
D1
O
Q
Q1
X
Quantity
Highly elastic demand refers to that situation where small fall in price causes more than
proportionate change in the quantity demanded of the commodity. The demand is highly
sensitive and the elasticity is high.
24
4. Inelastic Demand:
D
Y
Ep = 5 = 0.5
10
Price
P
Demand Curve
P1
D1
O
Q
Q1
X
Quantity
Inelastic demand refers to that situation where high fall in price causes slight change in
the quantity demanded of the commodity. The demand is insensitive and the elasticity is
low.
25
5. Unit Elasticity of Demand:
Y
Ep = 20 = 1
20
D
Price
P
Demand Curve
P1
D1
O
Q
Q1
X
Quantity
Unit elastic demand refers to that situation where any fall in price causes equally
proportionate change in the quantity demanded of the commodity. The elasticity is stable.
26
Factors / Determinants of Elasticity of Demand
•
•
•
•
•
•
•
Nature of the commodity
Availability of substitutes
Number of uses of a commodity
Proportion of consumers' income spent
Time period
Price level
Postponement of purchases
 Importance of Price elasticity
• Pricing decisions by the business
• Uses in economic policy
• Explanation of the paradox of plenty
• Importance in Fiscal policy
• Use in international trade
Income Elasticity of Demand
•
•
Income elasticity of demand may be defined as“The ratio of percentage change in quantity demanded of a goods to a percentage
change in income”.
• So Ei =
•
•
•
•
•
% change in quantity demanded
% change in income
Zero income elasticity
Positive income elasticity , when Ei > 0 for normal goods
Negative income elasticity, when Ei < 0 inferior goods
When Ei > 1 for luxury goods
When Ei < 1 for necessity goods
Cross Elasticity of Demand
Degree of responsiveness of demand for one goods in response to change in price of
another goods represents the cross elasticity of demand of one goods for the other
“ Cross elasticity of demand of x for y is – The ratio of % change in the quantity demanded
of goods x to % change in the price of goods y.
Ec =
% change in qty. demanded of x
% change in price of goods y
Example of cross elasticity- 1. Maruti suzuki8000, Vans, Swift, Esteem
2. Gillete razor & Blade
3 Automobile industry- Maruti (A Star) General Motor(Spark)
Ford(i10)
Importance of Elasticity of Demand
•
•
•
•
•
•
•
In production
For price determining
In Fiscal policy
In market competition
In international trade & Foreign exchange
In public finance.
In trade unions
Law of Supply
•
Meaning of Supply:
As demand is defined as a schedule of the qualities of good that will be purchased at
various prices,
similarly the supply refers to -the quantities of a good that will be offered for sale at
various prices by the firm.
“ Amount of a product which a producer is willing to or able to produce and make
available for sale in the market at specific price for a given period of time.”
Law of Supply
“ Other things being constant, when the price of a commodity rises the quantity supplied
of it in the market increases and when the price of the commodity falls its quantity
supplied decreases.”
So quantity supplied of a commodity has direct or positive relation with its price.
30
LAW OF SUPPLY:-
Price per
Quantity (Rs.)
Quantity Supplied
(In Quintals)
500
100
510
150
520
200
530
225
540
250
550
275
Diagrammatic Representation:
Y
S’
540
530
520
510
500
S
0
100 150 200 225 250
X
31
Factors determining supply
•
•
•
•
•
•
•
Number of producers or sellers in the market
State of Production technology
Cost of production (Factor price)
Prices of other products or related products
Objectives of the firm
Future price expectation
Taxes and Subsidies
•
ELASTICITY OF SUPPLY
•
Elasticity of supply of a commodity is defined as the responsiveness of quantity of a supplied
goods to change in price of that commodity.
•
•
•
“ The ratio of proportionate change in quantity supplied of a commodity to proportionate
change in the price of that goods.”
Es = % change in qty. supplied
% change in the price of that goods
•
(A) Types of Elasticity:
•
1. Perfectly Elastic Supply:
•
Perfect elasticity of supply refers to that situation where slightest rise in price causes the
quantity supplied of the commodity to infinity and contrary slightest fall in price decrease in
the quantity supplied of the commodity. The supply is hypersensitive and the elasticity is
infinity.
Y
•
Example: 5% increase in supply for no change in price
Es = 5 = ~.
0
Price
S
S1
O
X
Q
Q1
Supply
33
2. Perfectly Inelastic Supply:
Y
Es = 0 = 0.
5
Price
S
P1
P
O
X
S1
Supply
Perfect inelastic demand refers to that situation where any rise in price does not cause
any change in the quantity demanded of the commodity. The demand is insensitive and
the elasticity is zero
34
3. Highly Elastic Supply:
Y
Es= 40 = 2.
20
Price
S1
P1
Supply Curve
P
S
O
Q
Q1
X
Quantity
Highly elastic demand refers to that situation where small fall in price causes more than
proportionate change in the quantity demanded of the commodity. The demand is highly
sensitive and the elasticity is high.
4. Inelastic Supply:
Y
Es = 5 = 0.5
10
S1
Price
Supply
Curve
P1
P
S
O
Q
Q1
X
Quantity
35
Inelastic demand refers to that situation where high fall in price causes slight change in
the quantity demanded of the commodity. The demand is insensitive and the elasticity is
low.
5. Unit Elasticity of Supply:
Y
ES = 20 = 1
20
S1
Price
P1
Supply Curve
P
S
O
Q
Q1
X
Quantity
Unit elastic demand refers to that situation where any fall in price causes equally
proportionate change in the quantity demanded of the commodity. The elasticity is stable.
36
DETERMINANTS OF ELASTICITY OF SUPPLY:
Elasticity of supply is determined by following factors:
1. Time: While considering the elasticity of supply time plays a very vital role in its
determination. Normally the time period is divided into 3 categories:
 Market Period: It is very short term period and it is difficult to change any factor of
production. (Period duration max 1-3 Months)
 Short Period: In this period it is possible to adjust the quantity supplied by
variation in the variable factor. (Period duration max 6-18 Months)
 Long Period: This period is the long period and supplier getting sufficient time to
alter and expand the quantity to be supplied. (Period duration max 2 years & More)
2. Change in marginal cost of production
3. Response of the producers
4.
Availability of infrastructure facility and other inputs for
expanding output.
5. Possibility of substitution of one product for others.
37