(Demand from consumers view and supply from producers view)

(relation=P inc, D dec and P inc, S inc)

Law of demand- P inc then D dec , other factors remain constant

Reason for law of demand

1. Income effect- P inc @constant income, purchasing power dec, D fall

2. Substitute effect- P inc, Qd dec, reason- at higher P consumer shifts to buy a cheaper
substitute.

Demand eq and curve

P= a-b Qd

Meaning of demand curve(for understanding)

1. Price and Qd
2. consumer’s will to purchase
3. If MU and Q then MU

Other determinants of demand (SHIFT IN THE CURVE)

1. number and price of substitute goods
2. number and price of complementary goods
3. Consumer income – normal and inferior goods
4. Expectation of future price change- eg= mid night 12 price will rise so before 12 demand rises
5. Consumer taste/ preference
6. Distribution of income- equal dist of income and wealth then demand inc AND when unequal then
D fall.

Change is due to price change= movement along the curve

Change is due to other factor chng= shift in the curve

SUPPLY
Qs- amt of goods and services that a producer is willing and able to supply at current or prevailing
price level

Equation
Qs= a+bP

Other factors (mostly asked about demand’s factor so less imp) (producer pov)
1. Cost of production- raw material cost inc, supply dec
2. Profitability of alternative product- product which will bring more profit producer will inc Qs of
that product.
3. Profitability of goods in joint supply- primary(handloom business) and joint supply(handloom
business has a waste and make carpets from that so making carpets is joint supply)
4. Nature , random shocks etc- Supply fall
5. Aim of producer- 2 ways to generate revenue in market, total revenue= prices* quantity, so either
inc the prices and decrease quantity(called profit max.) or vica versa(called sales max.)
6. Speculation about price- future price inc, current supply fall
7. Number of supplier- higher the number of supplier higher the supply in market.
Determination of Price and output (simultaneous chng in D n S)
-clear market- D=S
free market- no govt intervention, only D n S affect the prices in mkt
(change in price) Movement = change in Qd/s
(change in other factor)Shift = change in D/S

price mechanism= process of reaching equilibrium from excess demand supply

we put price value in Qd to get quantity sold as goods can be sold only where there is demand
equilibrium price= Qd=Qs
redo tax qs
tax revenue= tax* 𝑄𝑠𝑜𝑙𝑑 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥

ch4 ELASTICITY

1. Price elasticity of demand= bwt P n D= -ve relation

% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑𝑠 𝑋 ΔQd 𝑃
(𝒐𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝒇𝒐𝒓𝒎𝒖𝒍𝒂) 𝑃𝐸𝐷𝑋 = = ∗
% Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑋 ΔP 𝑄𝑑
𝑃 𝑑𝑄𝑑
= ∗ (𝑑𝑖𝑓𝑓 𝑜𝑓 𝑄𝑑)
𝑄𝑑 𝑑𝑝

NOTE: price elasticity for normal goods is always -ve, -ve relation between price and Qd; PED= -
ve (always) -ve sign only indicate -ve relation btw 2
Δ𝑄
𝑎𝑣𝑔 𝑄 Δ𝑄 𝑎𝑣𝑔 𝑃
(𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒇𝒐𝒓𝒖𝒎𝒍𝒂) 𝑃𝐸𝐷 = = ∗
Δ𝑃 Δ𝑃 𝑎𝑣𝑔 𝑄
𝑎𝑣𝑔 𝑃
2. Price elasticity of supply= btw P and Qs = +ve relation
%Δ𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 Δ𝑄𝑠 𝑃
(𝑜𝑛𝑙𝑦 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑓𝑜𝑟𝑚𝑢𝑙𝑎) 𝑃𝐸𝑆 = = ∗
% Δ𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 Δ𝑃 𝑄𝑠
3. Income elasticity of demand
IED < 1 inferior goods
0<IED<1 normal goods
IED >1 luxurious goods
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐼𝐸𝐷 =
% Δ 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
4. Cross elasticity of demand
Substitute goods +ve
complementary goods -ve
% Δ in QdX
(𝑡ℎ𝑖𝑠 𝑖𝑠 𝑋 𝑤𝑟𝑡 𝑌)𝐶𝑃𝐸𝐷𝑋𝑌 =
% Δ in PriceY

TYPES OF PRICE ELASTICTY OF DEMAND

1. Elastic PED (meaning if P inc 10% then inc in Qd more than 10%)
* PED >1 OR ped< (-)1 [tho -ve relation but shown as]
*competition exists
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
>1
% Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 > % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
flatter slop

2. Inelastic PED
*PED < 1
*less competition
* steep slope [ \ ]
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
<1
% Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 < % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
3. Unit elastic
*PED=1
* less realistic situation
*rectangular hyperbola
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
4. Perfect elastic
* PED = ∞
* parallel to x axis
* constant prices, but Qd is changing frequently
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑎𝑛𝑦 𝑣𝑎𝑙𝑢𝑒
= =∞
% Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 0
5. Perfect inelastic PED
*PED=0
*parallel to y axis
* constant Qd, even when prices change
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 0
= =0
% Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑎𝑛𝑦 𝑣𝑎𝑙𝑢𝑒

Total expenditure method/ total revenue method

TE/TR= P*Qd

1. Price elastic demand- TE/TR and Qd moves in same direction

2. Price inelastic demand- TE/TR and P moves in same direction
3. Unit elastic- TE/TR are independent of change in P and Q

Price speculation(imp 5-6m) (happens due to other factor)

1. Stabilising speculation (eg temporary sale on shopping apps)
- speculator believes price movement is temporary.(if rn high price in future will be less)
- gap between two prices will be less meaning theres less variation hence there exist a stabilise
market.
2. Destabilising speculation
- speculator believes price move in same direction.(if rn high, also high in future)

Price ceiling- govt set max prices

-leads to shortage (less supply, more demand)
Price floor- min support price(MSP)
- excess supply, less demand

Ch5
Δ𝑇𝑈 𝑑𝑇𝑈
marginal utility= Δ𝑥
= 𝑑𝑥
x is an extra consumed unit

Optimum pt.= MU= price

Marginal consumption surplus= MU- Price

Total consumption surplus= TU- TE

it’s the area above the price and below the demand curve is consumer surplus

One commodity
𝑀𝑈𝑥 > 𝑃𝑥 rational
𝑀𝑈𝑥 = 𝑃𝑥 optimum and equi-marginal comsumption

Multi commodity model

𝑀𝑈𝑥 𝑃
𝑀𝑈𝑦
= 𝑃𝑥 optimum
𝑦
𝑀𝑈𝑥 𝑃𝑥
𝑀𝑈𝑦
> 𝑃𝑦
=> P of x dec OR relative P of x less than y
𝑃𝑥 𝑑𝑒𝑐, 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑜𝑟 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑥 𝑖𝑛𝑐
𝑀𝑈𝑥 𝑃𝑥
=
𝑀𝑈𝑦 𝑃𝑦

For n goods (less imp)

𝑀𝑈𝑥 𝑀𝑈𝑦 𝑀𝑈𝑛
= = ⋯………..=
𝑃𝑥 𝑃𝑦 𝑃𝑛

Intertemporal consumption
utility(immediately) > utility (tmrw)
present value inflow should > PV outflow, then allow Intertemporal consumption

Discounting factor, here I is interest rate(10% => i=0.1)

1
1+𝑖

Indifference analysis(v imp)

Assumtions
1. Consumer’s income is constant.
2. Price of goods remain same.

indifference curve shows all various combination of 2 goods that give equal amount of satisfaction or
utility to a consumer./

Marginal rate of substitution- how much to sacrifice from y axis when consuming an extra from x
axis
 ΔY 𝑑𝑦
𝑀𝑅𝑆 = = = 𝑠𝑙𝑜𝑝𝑒 𝑜𝑓 𝐼𝐶
ΔX 𝑑𝑥
𝑀𝑈𝑋
𝑀𝑅𝑆 =
𝑀𝑈𝑌
Note: 1.IC curve represents same utility
2. higher the IC curve higher the utility

Budget line
𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑚 (𝑖𝑛𝑐𝑜𝑚𝑒)

𝑚
𝑄𝑥 =
𝑃𝑥
on BL= no saving
under BL= saving (feasible region)
over BL= not feasible

Slope of BL
diff 𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑚 wrt to Qx
𝑑𝑄𝑦 𝑃𝑥
= − (𝑝𝑟𝑖𝑐𝑒 𝑟𝑎𝑡𝑖𝑜)
𝑑𝑄𝑥 𝑃𝑦

Impact on BL

1. Change in consumers income - shifting

2. Change in goods price – pivot along/around

Johnslowman (imp proof)Optimum consumption point - the single pt when IC curve is tangent on
BL

1. ICC- tells utility

2. BL

Higher the IC curve higher the satisfaction

IC is tangent on BL
𝑃𝑥
MRS = − 𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥 𝑃𝑥
= 𝑂𝑅 −
𝑀𝑈𝑦 𝑃𝑦 𝑃𝑦

Income consumption curve- how a persons optimum comb changes, when income changes.

Price consumption curve- how a persons optimum comb changes, when price changes.
BOOKLET 1 DONE

Ch6

1. Opportunity cost
2. Explicit cost
3. Implicit cost
4. Historic cost
5. Sunk cost
6. Replacement cost

Bygones principle- always consider variable factors not fixed factors

fixed factor- cant change in a short time
variable factor- can change
short run= fixed and variable
long run – only variable factors

# Production in short run

1. Total physical production[TPP]- total output produced using inputs in a given time period
2. Production function -relation between TPP and quantity of inputs
3. Average physical production[APP]- total prod/ qty of variable factor
𝑇𝑃𝑃
𝐴𝑃𝑃 =
𝑄𝑣
Δ𝑇𝑃𝑃
4.marginal physical production[MPP]- 𝑀𝑃𝑃 = Chng is Extra Qv
Δ𝑄𝑣

[DMR] Law of diminishing marginal returns(used in short run, as it talks about only fixed factors)-
when one or more factors are held fixed there will be a point , beyond which the extra output from
additional units of variable factor will diminish.

TPP inc @ inc rate (lies, DMR) TPP inc @ dec rate

JOHNSLOWMAN- DMR, TPP, MPP graph

TPP inc = MPP +ve

TPP <--> = MPP =0
TPP dec = MPP -ve

This tpp and mpp graph also called 3 production phases

MPP> APP, [before DMR] APP inc , AC dec

MPP<APP, [after DMR] APP fall, AC inc
MPP=APP, APP is max, AC is min.

#Cost in short run

TFC+ TVC= TC
efficiency DMR inefficieny
[benefit^ cost low, means prodn^ cost low] [benefit low cost^,meaning prodn low cost^]

𝑇𝐹𝐶
𝐴𝐹𝐶 = , ℎ𝑜𝑤 𝑚𝑢𝑐ℎ 𝑜𝑓 𝑓𝑖𝑥𝑒𝑑 𝑓𝑎𝑐𝑡𝑜𝑟 𝑢𝑠𝑒𝑑 𝑡𝑜 𝑚𝑎𝑘𝑒 𝑞𝑡𝑦 [𝑎𝑠 𝑄 𝑖𝑛𝑐 𝐴𝐹𝐶 = 0]
𝑄
𝑇𝑉𝐶
𝐴𝑉𝐶 = , 𝐴𝑉𝐶 𝑐𝑢𝑟𝑣𝑒 𝑑𝑒𝑝𝑒𝑛𝑑 𝑜𝑛 𝐴𝑃𝑃(−𝑣𝑒 𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝑏𝑡𝑤 2)
𝑄
𝑇𝐶 𝑇𝑉𝐶 + 𝑇𝐹𝐶
𝐴𝐹𝐶 + 𝐴𝑉𝐶 = 𝐴𝐶 = =
𝑄 𝑄
Δ𝑇𝐶
𝑀𝐶 =
ΔQ
JOHNSLOWMAN (ABOVE THINGS UNDERSTANDING)

Relation between MC and AC

MPP> APP, [before DMR] APP inc , AC dec
MPP<APP, [after DMR] APP fall, AC inc
MPP=APP, APP is max, AC is min.

# Production in long run(all variable factors)-

Scale of production
1.increasing returns to sale- % Δ in all input < % Δ in production
2.decreasing returns to sale- % Δ in all input > % Δ in production
3.constant returns to scale- % Δ in all input = % Δ in production

JOHNSLOWMAN BELOW(understanding)
reasons of economics of scale(long run avg cost falls, as qty inc)
1. Specialisation and division of labour
2. Indivisibility
3. Container principle- eg- a metallic cube container of side 2m has TSA(6a^2) 24 m^2 and vol 8 m^2
but its side is 5m then TSA is 150m^2 and vol is 125m^2. So % change in vol is more. Ultimately,
when we have large container with more storing capacity which shows the benefit portion and TSA
shows cost of production.
4. Greater efficiency of large machines
5. Production of the by products
6. Multiple stage production
7. Financial economics
8. Economics of scope- produce variety of products and experiencing long run avg cost dec

reason of diseconomics of scale(long run avg cost inc, as qty inc)

1. Managerial problem of coordination & communication
2. Poor industry relation
3. Poor motivation of workforce- human nature thing
Least input combination(short run)
𝑀𝑈𝑥 𝑃𝑥
=
𝑀𝑈𝑦 𝑃𝑦
𝑀𝑃𝑃𝐾 𝑃𝐾
=
𝑀𝑃𝑃𝐿 𝑃𝐿
𝑀𝑃𝑃𝐾 𝑀𝑃𝑃𝐿
=
𝑃𝐾 𝑃𝐿
𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟
𝑀𝑃𝑃𝐾 𝑀𝑃𝑃𝐿
< (you’lll employee more labour to inc production)
𝑃𝐾 𝑃𝐿

𝑀𝑃𝑃𝐾 𝑀𝑃𝑃𝐿
𝑃𝐾
= 𝑃𝐿
at DMR

Multiple input case

𝑀𝑃𝑃𝑎 𝑀𝑃𝑃𝑏 𝑀𝑃𝑃𝑛
= = ⋯…..
𝑃𝑎 𝑃𝑏 𝑃𝑛

# relation b/w SRAC and LRAC (envelope curve)

LRAC contain SRACs, meaning joining all short run cost we get log run cost called envelope curve

Revenue
TE/TR= P*Q_traded
𝑇𝑅 𝑄
AR= 𝑄
=𝑃∗𝑄 =𝑃

ΔTR 𝑑𝑇𝑅
MR= ΔQ = 𝑑𝑄

1. Revenue curves when Price is not affected by firm’s output (case of perfect market)
market/industry decide the price, firm’s price is constant. Firms are Price Takers (AR=D=MR)
2. Revenue curves when Price is affected by firm’s output (case of perfect market)
firm decide the price and output itself. Firms are Price Makers (AR=D). AR > MR
MR= additional gain in total revenue – loss by selling old units at now (lower ) prices

Case1: PED > 1 (elastic)

% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 > % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
MR > 1

Case2: PED<1 (inelastic)

% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 < % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
MR < 1

Case 3: PED =1
% Δ 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 = % Δ 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
MR=0

***rational producer produce in the elastic region

Profit(𝜋) maximisation
excess profits=super normal 𝜋

AR/MR approach
AR decides price
MC/MR decides Q
TR= AR*Q
TC= AC*Q
𝑇𝑅 − 𝑇𝐶 = 𝑇𝜋

Ch7
1st market= Perfect competition
assumptions
1. There are large number of buyers in the market
2. There are large number of suppliers in the market
3. Each firm has tiny share in the market
4. Each firm is price taker
5. Homogenous products are there.
6. Buyer and seller has perfect knowledge about market
7. No entry of barriers are there

#short run case

Market graph- with D and S curve with equilibrium
firm graph- price is constant(D= AR= MR), MC curve
MR= MC
AR= MC
P=MC (equilibrium position under short run/perfect market)

Short term time period- time period even in perfect competition, firms making profit

#long run case

Law Of Demand works only for Market
market graph- normal
firm – constant price(D=AR=MR), MC, AC(below D)

Economic efficiency
consumer = allocative efficiency(MU= price)
producer= productive efficiency (MR=MC)
maximum of total of these two is Social optimum

Monopoly(1seller)
assumptions
1. Single seller in the market
2. Firm is price maker(AR> MR)
3. Single firm has complete market share and having market power.
4. Barriers to entry is there
Natural monopoly- when a firm naturally experience, LRAC dec as production scale inc

#short run mai profits

long run mai normal profits (profits of short run got exhausted)[in this, normal profit= profit]

Barriers to entry (notes. Thoda details)

1. Natural barriers
2. Strategic
3. Legal

Perfect contestable market

when any firm can enter or take exit from the market without any cost.
(feature of perfect competition market, Not for monopoly)

What is required till now? Drawing Graph and assumptions

Ch8
# Monopolistic competition (monopoly and monopolistic are diff topics)
assumptions
1. There are large number of buyers in the market
2. There are large number of suppliers in the market
3. Firms having good market share (AR > MR)
4. Each firm is price maker
5. Each firm produces heterogenous products
6. Firms are independent of each other
7. No barriers to entry

#Short run
compare it with monopoly
𝑃𝑚 > 𝑃𝑚𝑜𝑛𝑜𝑝𝑜𝑙𝑖𝑠𝑡𝑖𝑐 , 𝑄𝑚 < 𝑄𝑚𝑜𝑛𝑜𝑝𝑜𝑙𝑖𝑠𝑡𝑖𝑐

Compare it with perfect comp.

𝑃𝑝𝑐 < 𝑃𝑚𝑜𝑛𝑜𝑝𝑜𝑙𝑖𝑠𝑡𝑖𝑐 , 𝑄𝑝𝑐 > 𝑄𝑚𝑜𝑛𝑜𝑝𝑜𝑙𝑖𝑠𝑡𝑖𝑐

#Long run

Oligopoly
assumptions
1. There are few firms in the market.
2. Each firm having enough market share, which can influence price and output of any other firm
3. There is barriers of entry
4. Firms are interdependent with each other
5. Most oligopolists produces differentiated products.
6. Non price competition is the feature

Oligopoly market
Duopoly: only two firms in the market
 types of oligopoly
1. Collusive oligopoly- friendly nature with rival
*fix the price of product
*limit the advertisement
*set output quota
2. Non collusive oligopoly- no written or verbal agreement
*rival in nature with each other

Game theory(non collusive nature)

the study of alternative strategies that player may choose to adopt, depending on their
assumptions about their rivals behaviour

Single move game

1. Dominant strategy- payoff=prices

FIRM B
HIGH LOW
FIRM A HIGH 6,4 2,6
LOW 8,0 4,2

for A
1. Assume B is at high prices. A will opt for low price
2. Assume B is at low prices. A will opt for low prices
A has dominance power over B

for B
1. Assume A is at high prices. B will opt for low price
2. Assume A is at low prices. B will opt for low prices
B has dominance power over A

in all4 cases low prices so (4,2) is Nash equilibrium/solution of game/equilibrium

2. Prisoners dilemma- it’s the scenario under which there are 2 or more firms who attempts
independently to choose the best strategy based on what others are likely to do and end kin a
worse position with they had corporated from the start.

Person B
Confession No C
Person A c 10,10 0,10
No c 10,0 5,5

3.Maximin and minimax

payoff=profits

FIRM B
winter summer
FIRM A W 10,20 7,6
s 5,10 4,1
Maximin- worse case
firmA
Min(winter)= 7
min(s)= 4
max(7,4)= 7= winter for A

Firm B
Min(winter)= 10
min(s)= 1
max(10,1)= 10= winter for B

(Winter, winter)- nash equilibrium by maximin strategy

Minimax
A
max(w)= 10
max(s)= 5
min(10,5)= 5= summer

B
max(w)= 20
max(s)= 6
min(20,6)= 6= summer

4. Trigger strategy

Multi move game

1. Tit for tat- you take any action and rivals also moves in the same direction sequentially.
2. Credibility threat- definition only

Oligopoly market
collusive oligopoly
1. Cartel