Quick Revision

 Economics – origin- Greek word- Oikos (household) and Nemein

(management).
 Economics- the science of human behaviour- allocation of
scarce means- consumer maximise satisfaction, producer-
profit, society- social welfare.
 Non-economic goods- goods that don’t command price due to
lack of scarcity. eg. sunlight, air.
 Scarcity- demand for resources exceeds its supply.
 Choice- selection from limited alternatives.
 The problem of choice- allocating scarce resources to
alternative uses.
 Economy- system- people of an area earn their living.
 Microeconomics- studies economic problems at the level of an
individual.
 Macroeconomics- studies economic problems at the level of
the economy as a whole.
 Positive- economics related to past, present or future- studied
by using facts and figures.
 Normative- economics of what ought to be- deals with
opinions.
 Simple economy- mutual interdependence limited.
 Complex- mutual interdependence high
 Centrally planned- controlled by the government.
 Market- controlled by market forces.
 Mixed- governed by market forces- regulated by the
government.
 Economic problems arise- unlimited wants, limited means,
alternative uses.
 Central problems- what to produce- related to choice/
allocation- goods and services to produce- quantity.
 How to produce- technique- labour or capital intensive- more
production at less cost.
 For whom to produce- sections of society- rich – poor, social
equality or justice.
 Underutilisation of resources- not fully utilised.
 Growth of resources- the problem of untapped resources.
 PPC/ PPF – graphical representation- possible combinations –
two goods- produce- given resource and technology.
 PPC characteristics/ properties- slopes downwards- produce
more of one, units of other good sacrifice. PPC concave to the
point of origin- MOC rise.
 Attainable combinations- on PPC or inside PPC.
 Unattainable- outside the boundary line of production.
 Shift PPC (both goods) – resources increase, technology
improve- shift right, resources decline/ technology obsolete -
shift left.
 Opportunity cost- value of factor in its next best alternative use.
 Marginal opportunity cost- the amount of one good sacrificed
to produce one more unit of other good. MOC = change in
loss/change in gain. ( take loss on y-axis and gain on x-axis)
 Marginal rate of transformation MRT- the rate at which units of
one good are sacrificed to produce more of other.
 Slope of PPC- MRT/ MOC
 Shapes of PPC – Convex- Decreasing MOC, Concave- Increasing
MOC and Straight line- Constant MOC.
 Utility- want satisfying power of a commodity.
 Cardinal – measured in cardinal numbers 1,2,3……. , ordinal –
can only be ranked.
 TU – sum total- consumption of all units. TU = MU1+MU2+………
Mun
 MU- additional utility- consumption of additional unit. MU=
TUn- TU n-1
 Relation TU and MU –
  TU increases at decreasing rate, MU positive
 TU maximum and constant, MU zero (point of satiety)
 TU Falls, MU negative.
 Slope of TU is MU.
 Law of DMU- more and more standard units of a commodity
are continuously consumed, MU from every additional unit
must decline.
 Consumer equilibrium- maximum satisfaction out of given
income, no tendency – change expenditure.
 Marginal utility of money- utility that consumer derives from
standard basket of goods that he can buy with a rupee. (worth
of a rupee).
 Consumer equilibrium one commodity- conditions- MUx= Px,
MU falls as consumption increases.
 MUx > Px – consumer gains more satisfaction than sacrifice in
terms of price paid- buys more of x good- law DMU operates,
MUx falls till equal to Px.
 MU< Px- consumer gains less satisfaction than sacrifice in terms
of price paid – buys less of X good- Law of DMU operates, MUx
rise till equal to Px.
 Consumer equilibrium Two (or several) commodities
Conditions- MUx/Px = MUy/ Py= MUm
MU falls as consumption increases.
 MUx/Px > MUy/ Py- induces the consumer to transfer some
expenditure from Y to X. Buying more of X reduces MUx, Px
remains unchanged, and MUx/Px is reduced.
 MUx/Px < MUy/ Py- induces the consumer to transfer some
expenditure from X to Y. Buying more of Y reduces MUy, Py
remains unchanged, and MUy/Py is reduced.
 Law of EQUI- MARGINAL UTILITY- a consumer get maximum
satisfaction, when the ratio of MU of two commodities and
 their respective prices are equal and MU falls as consumption
increases.
 Indifference curve- combinations of two goods- equal
satisfaction.
 Slope of IC – MRS
 The marginal rate of substitution (MRS) is the rate at which the
consumer is willing to substitute one good for the other.
 Indifference map- set of various indifference curves,
representing different levels of satisfaction.
 Indifference set- set of all consumption bundles, provide equal
level of satisfaction
 Scale of preferences- ranking of preferences.
 Convex preference- movement along the same IC.
 Features/ properties of IC-
 Slopes downwards- more of one good, must have less of other.
 Convex to the origin- MRS diminishes, MRS decline because of
Law of DMU.
 Higher IC shows Higher level of satisfaction- more of a good –
monotonic preferences
 IC don’t intersect each other- results in paradox.
 IC does not touch X axis or Y- axis – involves the consumption of
two goods simultaneously.
 Budget line- different possible combination of two goods-
purchased- given money income and market price.
 Slope of budget line – Px/ Py
 Properties budget line-
 Downward sloping- buy more of one by sacrificing other.
 Straight line- slope is constant because price ratio of two goods
remains constant.
 Budget constraint- cannot afford to buy beyond the limit set by
his budget line.
 Equation – budget line- PxQx +PyQy= M . budget constraint/ set
– PxQx+PyQy </= M
  Consumer equilibrium ( IC approach/ Hicksian approach)
Condition- MRSxy= Px/Py , MRS must be falling
Condition (diagram) – Budget line/ price line must be tangent to IC,
IC should be convex to origin.
 MRSxy > Px/Py – move downward to right of IC , MRSxy tend to
fall, consuming more of X in place of Y.
 MRSxy < Px/Py – move upward to left of IC , MRSxy tend to rise,
consume more of Y in place of X.
 Demand- desire to buy- sufficient purchasing power- willingness
to spend.
 Quantity demanded- specific quantity- specific price.
 Schedule- tabular presentation, curve- graphical presentation.
 Slope of demand curve- (-) change in price/ change in quantity
 Determinants- refer book
 Normal good- income effect positive, price effect negative.
 Inferior good- income effect negative.
 Giffen good- income effect negative, price effect positive.
 Law of demand- other things remain constant, inverse
relationship between quantity demanded and its own price.
 Demand curve slope downwards/ more is purchased when
price falls- law of DMU, income effect, substitution effect etc.
 Exceptions- Articles of distinction, Giffen good etc.
 Extension of demand- fall in own price, other things constant.
(downward movement)
 Contraction of demand- rise in own price, other things
constant. ( upward movement)
 Increase in demand- price constant, income increases, price of
substitute good increases, price of complementary goods falls,
taste favourable etc. (shift right)
 Decrease in demand - price constant, income decreases, price
of substitute good decreases, price of complementary goods
rise, taste unfavourable etc. (shift left).