The document provides definitions and explanations of key economic concepts: 1. Economics is defined as the study of how people choose to use scarce resources to satisfy unlimited wants. It involves production, distribution, and consumption of goods and services. 2. Scarcity means that resources are limited but wants are unlimited, so choices must be made. Opportunity cost is the next best alternative forgone in making a choice. 3. Demand is a consumer's willingness and ability to purchase a good at a given price, depicted by a downward sloping demand curve. The law of demand states that price and quantity demanded move in opposite directions. 4. A production possibility frontier shows the maximum output combinations of two goods given

1. Unit-1

2. Economics
Dictionary meaning :
The science that deals with the production,
distribution, and consumption of goods and
services, or the material welfare of
humankind.
A science concerned with the process or
system by which goods and services are
produced, sold, and bought.

3. Definition :
 “Economics is the study of how people
choose to use resources.
 Resources include the time and talent
people have available, the land, buildings,
equipment, and other tools on hand, and
the knowledge of how to combine them to
create useful products and services.

4.  A social science that studies how
individuals, governments, firms and nations
make choices on allocating scarce resources
to satisfy their unlimited wants.
 Economics is the study of the production
and consumption of goods and the transfer
of wealth to produce and obtain those
goods. Economics explains how people
interact within markets to get what they
want or accomplish certain goals

5. Scarcity and choice
“Economics is a science which studies human
behavior as a relationship between ends and scarce
means which have alternative uses”
a)
Here “ends” refer to wants. Human beings have wants
which are unlimited in number. If one want is satisfied
another crops up . since human wants are unlimited,
one is compelled to choose between the more urgent
and the less urgent wants. That is why economics is
called a science of choice.

6.  b) Although wants are unlimited yet the
means to satisfy them are strictly limited.
No doubt’ there are certain free goods which
also satisfy human wants. Yet most of the
things that we want are scarce.
c)The scarce means are capable of alternative
uses. These alternative uses are of varying
importance; some are more urgent and
others less urgent.

7. Economic activity lies in man’s
utilization of scarce means having
alternative uses, for the satisfaction of
multiple ends. “Means” refer to time,
money or any other form of property.
They are all limited. But since the ends
are unlimited, choice-making is
essential . That is why economics has
been called a “science of choice”

8. The logic of Economic
Economic life is very complicated. It involves people
buying, selling , burgaining , investing and
persuading. Economics aims at understanding those
complex undertakings.
Economists use the scientific approach to understand
economic life. This involves observing economic affairs
and drawing upon statistics and the historical record.
Economics relies upon analysis and theorie s. theoritical
approaches all economists to make broad
generalizations. Such as those concerning the
advantages of international trade and socialization
and the disadvantages of tariffs and quotas.

9. Economists have developed a specialized
technique known as “econometrics, which
applies the tools of statistics to economic
problems. Using econometrics, economists
can sift through mountains of data to exact
simple relationships.
Young economists must also be alert to
common fallacies in economic reasoning .
because economic relationships are often
complex, involving many different variables,
it is easy to become confused about the
exact reason behind events or the impact of
policies on the economy.

10. Micro economics
Micro economics: The branch of economics that
analyzes the market behavior of individual
consumers and firms in an attempt to understand
the decision-making process of firms and
households.
Micro economics : Microeconomics (from Greek
prefix mikro - meaning "small" and economics) is a
branch of economics that studies the behavior of
individuals and small impacting players in making
decisions on the allocation of limited resources.

11. —“Microeconomics is the study of the
economic actions of individuals and
well defined groups of individuals.”
—“Microeconomics is the study of the
economic actions of individuals and
well defined groups of individuals.”

12. Macroeconomics (from the Greek
prefix makro- meaning "large" and
economics) is the study of the
macroeconomy. It is a branch of
economics dealing with the
performance, structure, behavior, and
decision-making of an economy as a
whole, rather than individual markets.

13.  "Macroeconomics is the branch of economics
concerned with aggregates, such as national income,
consumption, and investment “
 The Economist's Dictionary of Economics defines
Macroeconomics as "The study of whole economic
systems aggregating over the functioning of individual
economic units.

14.  Macroeconomics : The word “Macro” comes from a
Greek word “Makros” which means large.
Macroeconomics is concerned with aggregates and
averages of the entire economy, such as national
income, savings and investments, aggregate demand
and supply

15. Microeconomics vs macro
economics
1.Microeconomics is the study of particular markets, and
segments of the economy.
Macro economics is the study of the whole economy.
2. Micro economics looks at issues such as consumer
behaviour, individual labour markets, and the theory
of firms.
Macro economics looks at ‘aggregate’ variables, such as
aggregate demand, national output and inflation.

16. 3. The word “Micro” has come from a Greek
word “Mikros” which means millions of
parts.
The word “Macro” comes from a Greek word
“Makros” which means large.
4. Microeconomics is also called price theory.
macro economics is called income theory.
5. Micro economics provides a microscopic
view .
Macro economics provides a bird view of the
whole economy.

17. 6. Micro economics is concerned with:
Supply and demand in individual markets
Individual consumer behaviour . e.g.
Consumer choice theory.
Individual labour markets – e.g. demand
for labour , wage determination.
Externalities arising from production and
consumption.

18. Macro economics is concerned with
Monetary / fiscal policy. e.g. what
effect does interest rates have on whole
economy?
Reasons for inflation, and
unemployment
Economic Growth
International trade and globalisation
Reasons for differences in living
standards and economic growth
between countries.

19. Interactions between Micro and Macro
Economics
 Microeconomics and macroeconomics
are inter-related because their fields of
interest are bound together and cannot be
separated. The decisions of individuals
make up the economies studied in
macroeconomics

20.  A microeconomist cannot possibly study the
investment policies of businesses without
understanding the impact of
macroeconomic trends such as economic
growth and taxation policies.
 Similarly, a macroeconomist cannot study
the components of output in a nation’s
economy without understanding the
demand of individual households and firms.

21. Functions of economic system
Economic system refers to the means by
which decisions involving economic
variables are made in a society.
In this light, a society’s economic system
determines how the society answers its
fundamental economic questions of what to
be produce, how the output is to be
produced, who is to get this output and how
future growth will be facilitated, if at all.

22. Economic systems everywhere may perform similar
functions. These functions may be traditional or non-
traditional.
The traditional functions include the following:
 a. What to produce
 b. How to produce i.e. what method of factor
combination to adopt in order to maximize the use of
the resources
 c. For whom to produce
 d. How to distribute the goods and services produced.

23. Traditional functions
The traditional functions of every economic system
include the following:
 a. In deciding on what goods to produce, an
economic system also decides in what not to
produce.
For example, if the system wants to provide roads and
recreational facilities, it may have problems since it
may lack enough resources to do so at the same time. It
will be necessary that it chooses between the two. It
may for instance have to choose roads.

24.  b. Economic systems also function to decide on the
particular technique to be used in production.
 Here, the economic system decides what method of factor
combination to be employed in order to maximize the use
of the scarce resources, by minimizing cost and increasing
productivity.
 The decision may involve whether to employ labor-
intensive or capital-intensive methods of production. In a
free exchange economy , its choice will depend on relative
factor endowment and factor prices. In developing
countries for instance, labor is more abundant and cheap.
A labor-intensive method may be preferred.

25.  c. Another problem the economic system
is faced with is for whom to produce.
To get maximum use from the scarce
resources, the commodity must be produced
in an area where it would be demanded and
where costs will be minimized.
The production unit may be sited near the
source of raw material or the market center
depending on the nature of the product.

26. Non-traditional functions
 d. Economic systems must ensure economic
growth.
Owing to scarcity of resources, the society must know
whether its capacity to produce goods and services is
expanding or decreasing.
Some of the major ways to promote economic growth are
ensuring adequate rate of growth of per capita income;
improvement in technology through the adoption of
superior techniques of production; better and more
extensive education and training of the labor force and
others.

27. e. Society must also ensure full employment. It is the
task of economic systems to ensure that resources are
not idle or unemployed, since resources are scarce.
 In the market economy, full employment is achieved
by stimulating demand.

28. Society’s Technological Possibilities
Every economy has a stock of limited resources- labor, technical
knowledge , factories and tools , land , energy . In deciding what
and how things should be produced, the economy is deciding how
to allocate its resources among the thousands of different possible
commodities and services.
“ Every gun that is made, every warship launched, every rocket
fired signifies, in the final sense, a theft from those who
hunger and are not fed”
….. President Dwight D. Eisenhower
( 34th President of United States, Term- January 20,1954 –January 20, 1961)
Contents :
1.Input and out put
2.The production possibility frontier
3. Opportunity cost

29. Input and Output
 In economics, factors of production are the inputs to the
production process. Finished goods are the output.
 Inputs : are commodities or services that are used to
produce goods and services. An economy uses its existing
technology to combine inputs to produce outputs.
 Outputs: are the various useful goods or services that
result from the production process and are either
consumed or employed in further production.
 Consider the production of “pizza”. The eggs , flour , heat,
pizza oven and chef’s labor are the inputs. The tasty pizza is
the output.

30.  Inputs are factors of production (land, labour, capital
and entreprenuership)
Factors of production :
 Resources required for generation of goods or services,
generally classified into four major groups:
 Land (including all natural resources), Land includes
not only the site of production but natural resources
above or below the soil.
 Labor (including all human resources),
 Capital (including all man-made resources), and
 Enterprise (which brings all the previous resources
together for production).

31.  Input determines the quantity of output i.e.
output depends upon input. Input is the
starting point and output is the end point of
production process and such input-output
relationship is called a production function.
 Factors of production may also refer
specifically to the primary factors, which
are stocks including land, labor (the ability
to work), and capital goods applied to
production. Materials and energy are
considered as secondary factors in
classical economics because they are
obtained from land, labour and capital.

32.  The primary factors facilitate production but
neither become part of the product (as with raw
materials) nor become significantly transformed by
the production process (as with fuel used to power
machinery).
 Output is the final good or service produced using
the factors of production through a production
process.

33.  To build a McDonald's requires land to build it on, labor
(because somebody has to build it), and capital (because the
restaurant will require technology, such as grills, fryers, and
other cooking devices to be successful). Therefore, the input
of land, labor, and capital into this project will produce the
output of a new McDonald's.
 Now, suppose someone walks into the McDonald's and
orders a cheeseburger. When he places the order, the
restuarant must input labor (from the person who makes
the burger) and capital (the grill that is required to make it).
By inputting labor and capital into this project, they will
produce the output of a cheeseburger.
 The restaurant can then sell this cheeseburger to the
customer and, assuming that the price charged is higher
than the price of making the burger, will make a profit

34. Production Possibility Frontier
A production–possibility frontier (PPF), sometimes
called a production–possibility curve, production-
possibility boundary or product transformation curve,
is a graph that shows the various combinations of amounts
that two commodities could produce using the same fixed
total amount of each of the factors of production.

35.  PPF A curve depicting all maximum output
possibilities for two or more goods given a set of inputs
(resources, labor, etc.).
 A production possibility frontier (PPF) is a curve or
a boundary which shows the combinations of two or
more goods and services that can be produced by
using all of the available factor resources efficiently.
 An economy that is operating on the PPF is said to be
efficient, meaning that it would be impossible to
produce more of one good without decreasing
production of the other good.

36. A diagram showing the production possibilities frontier (PPF)
curve for producing "Gun" and "butter". Point "A" lies below the
curve, denoting underutilized production capacity. Points "B", "C",
and "D" lie on the curve, denoting efficient utilization of
production. Point "X" lies outside the curve, representing an
impossible output for existing capital and/or technology. Shift of
PPF to point "X", will change if their improvement of factors of
production (Capital and/or technology)
A PPF typically takes the form of the curve on the right.

37. Shifts in the Production Possibility Frontier
The production possibility frontier will shift when:
 There are improvements in productivity and
efficiency perhaps because of the introduction of
new technology or advances in the techniques of
production
 More factor resources are exploited perhaps due to
an increase in the size of the workforce or a rise in the
amount of capital equipment available for businesses

39. Opportunity cost
The opportunity cost is the value of the best
alternative forgone, in a situation in which a
choice needs to be made between several
mutually exclusive alternatives given limited
resources.
.

40. The cost of an economic decision. The classic
example is "guns or butter." What should a nation
produce; butter or guns . If we choose the guns the
cost is the butter. If we choose butter, the cost is
the guns

41. Increasing butter from A to B carries little opportunity cost, but for C to D the cost
is great.

42. Theory of Demand & Supply
Demand :
An economic concept that describes a
consumer's desire and willingness to pay a
price for a specific good or service.
Holding all other factors constant, the price of
a good or service increases as its demand
increases and vice versa.

43. Demand
 Demand is a buyer's willingness and ability
to pay a price for a specific quantity of a
good or service. Demand refers to how
much (quantity) of a product or service is
desired by buyers at various prices.
A person is said to have demand , if he has the
followings-
1.Willingness to purchase
2. Ability to purchase
3.Intention to pay

44. The Law of Demand
The law of demand states that, if all other factors
remain equal, the higher the price of a good, the less
people will demand that good.
In other words, the higher the price, the lower the
quantity demanded.

45. A, B and C are points on the demand curve. Each point on the
curve reflects a direct correlation between quantity demanded
(Q) and price (P). So, at point A, the quantity demanded will be
Q1 and the price will be P1, and so on. The demand relationship
curve illustrates the negative relationship between price and
quantity demanded. The higher the price of a good the lower the
quantity demanded (A), and the lower the price, the more the
good will be in demand (C).

46. Demand schedule :
 In economics, the demand schedule is a
table of the quantity demanded of a good at
different price levels.
 Thus, given the price level, it is easy to
determine the expected quantity demanded.
This demand schedule can be graphed as a
continuous demand curve on a chart having
the Y-axis representing price and the X-axis
representing quantity.

47. Demand curve :
In economics, the demand curve is the graph
depicting the relationship between the price of a
certain commodity and the amount of it that
consumers are willing and able to purchase at that
given price. It is a graphic representation of a demand
schedule

48. Price per unit Quantity of demand Achieved point
4 2 a
3 4 b
2 6 c
1 8 d
Demand schedule

49. Drawing a demand curve from demand schedule
D
D
a
b
c
d
4
3
2
1
0
2 4 6 8
y
x

50. supply
 Supply represents how much the market can offer. The
quantity supplied refers to the amount of a certain
good producers are willing to supply when receiving a
certain price.
 In economics, supply refers to the amount of a
product that producers and firms are willing to sell at a
given price all other factors being held constant.

51. Factors affecting supply
Good's own price: The basic supply relationship is
between the price of a good and the quantity
supplied.
Prices of other goods: if the price of substitute
goods increases ,supply of concerned goods will
increase.
Conditions of production: The most significant
factor here is the state of technology. If there is a
technological advancement in one good's
production, the supply increases.

52.  Expectations: If the seller believes that the demand
for his product will sharply increase in future the firm
owner may immediately increase production in
anticipation of future price increases. The supply curve
would shift out.
 Price of inputs: Inputs include land, labor, energy
and raw materials. If the price of inputs increases the
supply curve will shift left as sellers are less willing or
able to sell goods at any given price.
 For example, if the price of electricity increased a seller
may reduce his supply of his product because of the
increased costs of production.
 Number of suppliers: As more firms enter the
industry the market supply curve will shift out driving
down prices.

53.  Government policies and regulations: Government
intervention can have a significant effect on supply.
 Government intervention can take many forms
including environmental and health regulations, hour
and wage laws, taxes, electrical and natural gas rates
and zoning and land use regulations.
 Other factors--
1.Tax and subsidy
2.weather
3.joint product ( raw hide and beef)

54. Supply Curve
Supply Curve is a graphic representation
of the relationship between product
price and quantity of product that a
seller is willing and able to supply.
Product price is measured on the vertical
axis of the graph and quantity of
product supplied on the horizontal axis

55. Supply schedule
Price per unit Quantity of supply Achieved point
1 5 a
2 10 b
3 15 c
4 20 d

56. Y
1
2
3
4
0 5 10 15 20 X
s
s
p
r
i
c
e
Quantity

57. Supply and Demand Relationship
The relationship is an inverse one. When demand
increases, supply decreases. When supply decreases,
demand increases .

58. Equilibrium
When supply and demand are equal (i.e. when the
supply function and demand function intersect)
the economy is said to be at equilibrium . At this
point, the allocation of goods is most efficient
because the amount of goods being supplied is
exactly the same as the amount of goods being
demanded.
Thus, everyone (individuals, firms, or countries) is
satisfied with the current economic condition. At
the given price, suppliers are selling all the goods
that they have produced and consumers are
getting all the goods that they are demanding.

61. Equilibrium occurs at the intersection of the demand
and supply curve, which indicates no allocative
inefficiency.
At this point, the price of the goods will be P* and the
quantity will be Q*. These figures are referred to as
equilibrium price and quantity.
In the real market place equilibrium can only ever be
reached in theory, so the prices of goods and services
are constantly changing in relation to fluctuations in
demand and supply.

62. Shifts vs. Movement
 1. Movements
A movement refers to a change along a curve. On the
demand curve, a movement denotes a change in both
price and quantity demanded from one point to
another on the curve.
 The movement implies that the demand relationship
remains consistent. Therefore, a movement along the
demand curve will occur when the price of the good
changes and the quantity demanded changes in
accordance to the original demand relationship. In
other words, a movement occurs when a change in the
quantity demanded is caused only by a change in
price, and vice versa.

64. Like a movement along the demand curve,
a movement along the supply curve means
that the supply relationship remains
consistent.
Therefore, a movement along the supply
curve will occur when the price of the good
changes and the quantity supplied changes
in accordance to the original supply
relationship. In other words, a movement
occurs when a change in quantity supplied is
caused only by a change in price, and vice
versa.

66. 2. Shifts
A shift in a demand or supply curve occurs when a
good's quantity demanded or supplied changes even
though price remains the same.

68.  For instance, if the price for a bottle of beer was $2 and
the quantity of beer demanded increased from Q1 to
Q2, then there would be a shift in the demand for beer.
 Shifts in the demand curve imply that the original
demand relationship has changed, meaning that
quantity demand is affected by a factor other than
price. A shift in the demand relationship would occur
if, for instance, beer suddenly became the only type of
alcohol available for consumption

70. Conversely, if the price for a bottle of beer was $2
and the quantity supplied decreased from Q1 to
Q2, then there would be a shift in the supply of
beer.
Like a shift in the demand curve, a shift in the supply
curve implies that the original supply curve has
changed, meaning that the quantity supplied is
effected by a factor other than price. A shift in the
supply curve would occur if, for instance, a natural
disaster caused a mass shortage of hops; beer
manufacturers would be forced to supply less beer
for the same price.

71. Demand shifters:
1.Changes in disposable income, the magnitude of the shift
also being related to the income elasticity of demand.
2.Changes in tastes and preferences - tastes and preferences
are assumed to be fixed in the short-run. This assumption of
fixed preferences is a necessary condition for aggregation of
individual demand curves to derive market demand.
3.Changes in expectations.
4.Changes in the prices of related goods (substitutes and
complements)
5.Population size and composition.