Contents

1. Economics ................................................................................................................................. 4
1.1. Methods in Economics ................................................................................................... 4
1.2. Economic Goals, Policy, and Reality ................................................................................ 5
1.2.1. Economic Goals ............................................................................................................. 5
1.2.2. Policy ............................................................................................................................. 5
1.2.3. Objective Thinking ......................................................................................................... 6
2. Economic Problems ................................................................................................................... 6
2.1. Factors of production ..................................................................................................... 6
2.2. Economic Efficiency ........................................................................................................ 7
2.3. Economic Cost ................................................................................................................ 7
2.4. Production Possibilities .................................................................................................. 7
2.5. Economic Systems .......................................................................................................... 8
3. The Basics of Supply and Demand .............................................................................................. 8
3.1. Market ........................................................................................................................... 8
3.2. The law of demand ......................................................................................................... 8
3.3. Marginal utility ............................................................................................................... 9
3.4. A demand curves............................................................................................................ 9
3.5. Market Demand ........................................................................................................... 10
3.6. Demand Segments and Price Discrimination................................................................. 10
4. Law of Supply .......................................................................................................................... 10
4.1. Market Equilibrium ...................................................................................................... 11
4.2. Shortages and Surpluses............................................................................................... 11
4.3. Types of competition .................................................................................................... 12
4.4. Supply Analysis............................................................................................................. 12
4.4.1. Long run ...................................................................................................................... 12
4.4.2. short-run ..................................................................................................................... 12
4.5. Fixed costs.................................................................................................................... 12
4.6. Marginal costs .............................................................................................................. 12
5. Supply & Demand: Elasticities .................................................................................................. 12
5.1. The price elasticity ....................................................................................................... 12
5.1.1. The price elasticity coefficient (midpoints formula) ...................................................... 13
5.1.2. Point elasticity ............................................................................................................. 13
5.1.3. The mid-point .............................................................................................................. 13
5.2. Elastic demand ............................................................................................................. 13
5.2.1. Price elasticity of demand ............................................................................................ 13

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 5.2.2. Inelastic demand means .............................................................................................. 13
5.2.3. Unit elastic demand means.......................................................................................... 13
5.3. The total revenue tests ................................................................................................. 14
5.4. Supply Analysis............................................................................................................. 14
5.4.1. Market period.............................................................................................................. 14
5.4.2. Short-run ..................................................................................................................... 14
5.4.3. Long-run ...................................................................................................................... 15
5.5. Other Elasticities .......................................................................................................... 15
5.5.1. The cross elasticity of demand ..................................................................................... 15
5.5.2. The income elasticity of demand ................................................................................. 15
5.5.3. The interest rate elasticity of demand .......................................................................... 15
6. Costs of Production.................................................................................................................. 15
6.1. Explicit costs ................................................................................................................. 15
6.2. Implicit costs ................................................................................................................ 15
6.3. Marginal product.......................................................................................................... 16
6.4. The law of diminishing.................................................................................................. 16
6.5. Calculate cost formulas ................................................................................................ 16
6.6. The long-run average total cost curve (LRATC) .............................................................. 16
7. Type of market ........................................................................................................................ 17
7.1. Perfectly competitive ................................................................................................... 17
7.2. pure monopoly............................................................................................................. 17
7.3. monopolistically ........................................................................................................... 17
7.4. oligopoly ...................................................................................................................... 17
7.5. Keywords ..................................................................................................................... 18
7.5.1. Economic profit ........................................................................................................... 18
7.5.2. Price discrimination ..................................................................................................... 18
7.5.3. Regulated Monopoly ................................................................................................... 18
8. Quantitative Decision-Making .................................................................................................. 19
8.1. Analytics....................................................................................................................... 19
8.1.1. Descriptive analytics .................................................................................................... 19
8.1.2. Diagnostic analytics ..................................................................................................... 19
8.1.3. Prescriptive analytics ................................................................................................... 19
8.1.4. Predictive analytics ...................................................................................................... 19
8.2. Relevant cost................................................................................................................ 19
8.3. Bottleneck .................................................................................................................... 19
8.4. Overhead cost .............................................................................................................. 19
8.4.1. Fixed cost .................................................................................................................... 19
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 8.4.2. Variable cost ................................................................................................................ 19
8.5. Optimization problem .................................................................................................. 19
8.6. Sensitivity report .......................................................................................................... 19
9. Forecasting .............................................................................................................................. 20
9.1. Forecasting technique .................................................................................................. 20
9.1.1. Quantitative technique ................................................................................................ 20
9.1.2. Qualitative technique .................................................................................................. 20
9.2. Evaluating Forecasts ..................................................................................................... 21
9.2.1. Error ............................................................................................................................ 21
9.2.2. Mean absolute deviation (MAD): ................................................................................. 21
9.2.3. Mean squared error (MSE):.......................................................................................... 21
9.2.4. Mean absolute percentage error (MAPE): .................................................................... 21
10. Ethics and business .............................................................................................................. 21

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1. Economics
• Economics is a social science. Economics is the study of the ALLOCATION of SCARCE
resources to meet UNLIMITED human wants.
• Underlying all of economics is the base assumption that people act in their own perceived
best interest (at least most of the time and in the aggregate).
• Economics is generally classified into two general categories of inquiry; these two categories
are: microeconomics and macroeconomics.

Microeconomics is concerned with decision-making by individual economic agents such as firms and
consumers.

Macroeconomics is concerned with the aggregate performance of the entire economic system

Mankiw’s 10 Principles

• People Face Tradeoffs

• The Cost of something is What you Give Up to get it
• Rational People think at the Margin
• People Respond to Incentives
• Trade can make everyone better off
• Economic Activity takes place through markets
• Governments can intervene to change market outcomes
• National income is directly related to national productivity
• More Money Supply → price rise
• Government faces a tradeoff between inflation and employment in the short run

1.1. Methods in Economics

Economists seek to understand the behaviour of people and economic systems using scientific
methods. These scientific endeavours can be classified into two categories of activities
• Economic theory relies upon principles to analyze behaviour of economic agents.
These theories are typically rigorous, mathematical representations of human behaviour
with respect to the production or distribution of goods and services in microeconomics –
and the aggregate economy in macroeconomics.
• Empirical economics relies upon facts to present a description of economic activity.
Empirical economics is used to test and refine theoretical economics, based on tests of
economic theory

• econometrics is the arena in economics in which empirical tests of economic theory occurs.
• Mathematical Economics - is a form of economics that relies on quantitative methods to
describe economic phenomena
• Experimental Economics - uses controlled, scientific experiments to test what choices people
actually make in specific circumstances
• Game Theory - the study of mathematical models of strategic interactions among rational
agents. Economists often use game theory to understand oligopoly firm behaviour.
• Historical Analysis – is a method of the examination of evidence in coming to an understanding
of the past
• Survey Research - a snapshot of the major economic developments that have taken place in the
last one year and gives a glimpse of what is to come ahead in the short to medium term

Theory concerning human behaviour is generally constructed using one of two forms of logic

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• Inductive logic creates principles from observation
• Deductive logic involves formulating and testing hypotheses. E.g if I increase the price of ice
cream from 50 to 100, there won’t have any impact on the purchase.

The tests of hypotheses can only serve to reject or fail to reject a hypothesis. Therefore, empirical
methods are focused on rejecting hypotheses and those that fail to be rejected over large numbers
of tests generally attain the status of principle.

The purpose of economic theory is to describe behaviour, but behaviour is described using models.
Models are abstractions from reality - the best model is the one that best describes reality and is the
simplest (the simplest requirement is called Occam's Razor: When there are 2 reasons choose the
simple one.)

Ceteris paribus - means all other things equal. This assumption is used to eliminate all sources of
variation in the model except those sources under examination

Qd = f (I, T, Pr, E, P) ➔Income, Taste and preferences, price of related goods, expectation, Price of
the good)

1.2. Economic Goals, Policy, and Reality

1.2.1. Economic Goals
Goals are, in a sense, an idea of what should be (what we would like to accomplish). Goals are, in a
sense, an idea of what should be (what we would like to accomplish). Planning to finish your
education is an economic goal. Economics can be again classified into positive and normative
economics.

• Positive economics is concerned with what is; Evidence concerning economic performance or
achievement of goals falls within the domain of positive economics. Positive economics is based
on fact and cannot be approved or disapproved. Example -Study the price of goods or services in
competitive market
• Normative economics is concerned with what should be. Economic goals are examples of
normative economics. Normative economics is based on value judgments. Example cut taxes in
half to increase disposable income levels.

Economics also generally assumes that more is preferred to less by all consumers and firms.

• economic efficiency,
• economic growth,
• economic freedom,
• economic security,
• an equitable distribution of income,
• full employment,
• price level stability, and
• a reasonable balance of trade.

1.2.2. Policy
Policy can be generally classified into two categories, public and private policy.

• Public policy is how economic goals are pursued. The strength of public policy is created in the
open, with public debate, and often has the force of law. The steps in formulating policy are –
o stating goals - must be measurable with specific stated objective to be accomplished.
o options - identify the various actions that will accomplish the stated goals & select one,

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 o evaluation - gather and analyze evidence to determine whether policy was effective in
accomplishing goal, if not reexamine options and select option most likely to be effective.
• private policy is not subject to democratic processes. The Board of Directors or management of
a company will decide what goals are to be accomplished and what policy options are best used
to do so. Often private policy is made behind closed-doors without public accountability, even
though there are often public costs imposed

1.2.3. Objective Thinking

if an inconsistency between economics and ethics is discovered in a particular application, a rational
person will normally select the option that is the least costly. There are several common pitfalls to
objective thinking in economics.

• The fallacy of composition is the mistaken belief that what is true for the individual must be true
for the group.
• Post hoc, ergo prompter hoc means after this, hence because of this, and is a fallacy in
reasoning. Simply because one event follows another does not necessarily imply there is a causal
relation

Simple answers to complex problems are appealing, abundant, and often wrong. Occam’s razor is a
principle of theory construction or evaluation according to which, other things equal, explanations
that posit fewer entities, or fewer kinds of entities, are to be preferred to explanations that posit
more. It is sometimes misleadingly characterized as a general recommendation of simpler
explanations over more complex ones.

Unintended consequences- Fail to anticipated the consequences of certain aspects of policy may
cause results that were neither intended nor anticipated by the policy-makers

2. Economic Problems
Economics is concerned with decision-making. An economic decision is one that allocates resources,
time, money, or something else of use or value.

The economizing problem involves the allocation of resources among competing wants. The
economizing problem exists because there is scarcity. Scarcity arises because of two facts-

• There are unlimited human wants,

• There are limited resources available to meet those wants.

Economists do not differentiate between wants and needs in examining scarcity. Because there is
scarcity there is always the question of how resources are allocated and the effects of allocations on
various economic agents.

2.1. Factors of production

The resources used to produce economic goods and services (also called commodities)
• Technology - The way that these resources are combined to produce is called technology
• Land is a factor of production. Land includes space, natural resources, and what is commonly
thought of as land. The factor payment that accrues to land for producing is rent.
• Capital includes the physical assets (i.e., plant and equipment) used in the production of
commodities. Capital receives interest for its contributions to production. Economists also
called the skills, abilities, and knowledge of human beings as human capital
• Labor includes the broad range of services (and their characteristics) exerted in the
production process. Labor is paid wages for its contribution to the production of
commodities
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 • Entrepreneur (risk taker) is the economic agent who creates the enterprise. This factor of
production receives profits for its contribution to output.

2.2. Economic Efficiency

Economic efficiency consists of three components
• Allocative efficiency - Allocative efficiency is concerned with how resources are allocated.
Allocative efficiency is measured using a concept known as Pareto Optimality (or Superiority
in an imperfect world). Pareto Optimality is that allocation where no person could be made
better off without inflicting harm on another
• Technical or productive efficiency - Technical efficiency is defined as the minimization of
cost for a given level of output or (alternatively) for a given level of cost you maximize
output.
• Full employment - For an economic system to be economically efficient then full
employment is also required
Full employment is the utilization of all resources that is consistent with normal job search
and maintenance of productive capacity. Underemployment results from the utilization of a
resource that is less than what is consistent with full employment.

2.3. Economic Cost

Economic cost consists of two distinct types of costs:

• Explicit (accounting) costs - Explicit costs are direct expenditures in the production process.
These are the items of cost with which accountants are concerned.
• Opportunity (implicit) costs - An opportunity cost is the next best alternative that must be
foregone as a result of a particular decision

2.4. Production Possibilities

The production possibilities model is used to illustrate the concepts of opportunity cost, productive
factors and their scarcity, economic efficiency (unemployment etc.) and the economic choices an
economy must make with respect to what will be produced. The four assumption which underpin
the production possibilities curve model are-

• The economy is economically efficient,

• There are a fixed number of productive resources,
• The technology available to this economy is fixed, and
• In this economy we are going to produce only two commodities.
Along the vertical axis we measure the number of units of beer we can produce and along
the horizontal axis we measure the number of units of pizza we can produce. Where the
solid line intersects the beer axis shows the amount of beer, we can produce Beer Pizza. if all
our resources are allocated to beer production. Where the solid line intersects the pizza axis
indicates the amount of pizza we can produce if all of our resources are allocated to pizza
production. Along the solid line between the beer axis and the pizza axis are the
intermediate solutions where we have both beer and pizza being produced.

The reason the line is curved, rather than straight, is that the resources used to produce
beer are not perfectly useful in producing pizza and vice versa

The dashed line represents a second production possibilities curve that is possible with
additional resources or an advancement in available technology.

Production Possibility Curve

Increasing Opportunity Costs is illustrated in the above production possibilities curve. Notice as we obtain more pizza (move to the
right along the pizza axis)
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A point consistent with inefficiency, unemployment, or underemployment is identified by the symbol to the inside of the curve.

The dashed line in the above model shows a shift to the right of the curve. The only way this can happen is for there to be more
 2.5. Economic Systems
Production and the allocation of resources occur within economic systems. Economic systems rarely exist
in a pure form

• Pure capitalism is characterized by private ownership of productive capacity, very limited

government, and motivated by self-interest. This type of system has the benefit of producing
allocative efficiency if there is no monopoly power, but this type of system tends towards heavy
market concentration left unregulated. There are substantial costs associated with pure
capitalism. These costs include significant loses of freedom, poverty, income inequity. This type
of system has the benefit of producing allocative efficiency if there is no monopoly power, but
this type of system tends towards heavy market concentration left unregulated. There are
substantial costs associated with pure capitalism. These costs include significant loses of
freedom, poverty, income inequity
• Command economies the government makes the allocative decisions. These decisions are
backed with the force of law (and sometimes martial force). Examples, of these types of systems
abound, Nazi Germany, Chile, the former Soviet Union are but a few examples.
• Traditional economies base allocations on social mores or ethics or other non-market, non-
legislative bases. For example, Iran is an Islamic Republic and the allocation of resources is
heavily influenced by religious precepts. The purest forms of traditional economies are typically
observed in tribal societies.
• Socialism generally focuses on maximizing individual welfare for all persons based on perceived
needs, not necessarily on contributions. Socialist systems are generally concerned more with
perceived equity rather than efficiency. The basic idea here is that when there is assurance of
economic security then society in general is better-off. Sweden, Denmark, Norway and Iceland
have systems that have large elements of socialism.
• Communism is a system where everyone shares equally in the output of society (according to
their needs), at least theoretically. Generally, there is no private holdings of productive
resources, and government is a trustee until such time as what is called "Socialist Man" fully
develops (where the individual is more concerned with aggregate welfare than individual gain)

3. The Basics of Supply and Demand

Consumers buy goods because they drive some utility or happiness from their purchases. Businesses
purchase inputs to help generate a profit. a buyer’s willingness to pay for a particular unit of a
particular good is defined as the highest price at which the buyer would choose to purchase the unit
of the good

3.1. Market
A market is nothing more or less than the locus of exchange, it is not necessarily a place, but simply
buyers and sellers coming together for transactions.

3.2. The law of demand

states that as price increases (decreases) consumers will purchase less (more) of the specific
commodity, ceteris paribus. Ceteris paribus is a Latin phrase that generally means "all other things

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being equal." In economics, it acts as a shorthand indication of the effect one economic variable has
on another, provided all other variables remain the same.

As price falls from P1 to P2 the quantity demanded increases from Q1

to Q2. This is a negative relation between price and quantity, hence
the negative slope of the demand schedule; as predicted by the law of
demand.

3.3. Marginal utility

The change in utility derived from the consumption of one more unit of a commodity is called
marginal utility

Diminishing marginal utility: The idea that utility with the amount added to total utility will decline
when additional units are consumed. (Additional pizza eating example)

There are two effects that follow from consumers attempt to maximize their well-being when the
price of a commodity changes.

The income effect is the fact that as a person's income increases (or the price of item goes down
[which effectively increases command over goods] more of everything will be demanded

The substitution effect is the fact that as the price of a commodity increases, consumers will buy
less of it and more of other commodities.

Changes in the price of a commodity causes movements along the demand curve; such movements
are called changes in the quantity demanded. Changes in the price of a commodity causes
movements along the demand curve; such movements are called changes in the quantity
demanded

• A shift to the right of the demand curve is called an increase in demand.

• A shift to the left of the demand curve is called a decrease in demand.

A buyer’s willingness to pay is influenced by a number of factors. The nonprice determinants of

demand are;

• Tastes and preferences of consumers,

• The number of consumers,
• The money incomes of consumers,
• The prices of related goods,
• Consumers' expectations concerning future availability or prices of the commodity.
o If consumers expect future prices to increase, their present demand curve will shift
to the right.
o If consumers expect prices to fall then we will observe a decrease in current
demand.

3.4. A demand curves

A demand curve specifies the quantity of a good that the individual would purchase at each price.

A demand curve usually slopes downward since buyers are normally willing to pay less and less for
additional units of a good as they buy more and more. For business buyers, the downward slope of

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the demand curve reflects decreases in the productivity of additional purchases. eg ice crème
example

Shifts in the Demand Curve - changes in the above factor bring the make changes in the demand
curve. e.g yearend bonus

3.5. Market Demand

The sum of the demand of individual consumers or businesses at each price results in a market
demand curve.

The prices of related commodities also effect the demand curve

• Substitutes-A substitute is something that is alternative commodity, i.e., Pepsi is a substitute

for Coca-Cola. the price of the complement and the demand for our commodity move in
opposite directions. products are often substitutes if the demand for one product increases
when the price of the other goes up.
• Complements - A complement is something that is required to enjoy the commodity, i.e.,
gasoline and automobiles. the price of the complement and the demand for our commodity
move in opposite directions. If the price of a complement increases, the demand for our
commodity will decrease. (If price petrol increase, demand of the car may decrease)

3.6. Demand Segments and Price Discrimination

Demand is likely to be composed of many distinct segments. e.g printer - different price for
different type of printer to cater all different type of consumer
Price discrimination - Firms often try to close this gap by charging different prices to different
buyers, a practice known as price discrimination. Example - issuing coupons, applying specific
discounts (e.g., age discounts), and creating loyalty programs
• first-degree price discrimination involves charging consumers the maximum price
that they are willing to pay for a good or service. Luxury products
• Second-degree price discrimination involves charging consumers a different price for
the amount or quantity consumed.
• Also known as group price discrimination, third-degree price discrimination involves
charging different prices depending on a particular market segment or consumer
group. It is commonly seen in the entertainment industry.

4. Law of Supply
is that producers will supply more the higher the price of the commodity. The supply curve is an
upward sloping function showing a direct relationship between prices and the quantity supplied.
The supply curve is an upward sloping function showing a direct relationship between prices and
the quantity supplied.
• A shift to the left of the supply curve is called a decrease in supply
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 • A shift to the right is called an increase in supply
A decrease in supply is shown by
The nonprice determinants of supply are- S3, notice that there is a lower
quantity supplied at each price
• Resource prices, with S3 (dotted line) than with S1
• Technology, (solid line). The second panel
• Taxes and subsidies, shows an increase in supply,
• Prices of other goods, notice that there is a larger
• Expectations concerning future prices quantity supplied at each price
• The number of sellers. with S2 (dotted line) than with S1
(solid line).

4.1. Market Equilibrium

occurs where supply equals demand (supply curve intersects demand curve). An equilibrium implies
that there is no force that will cause further changes in price, hence quantity exchanged in the market.
Equilibrium price (Pe) and Equilibrium quantity (Qe)
The graph of a market in equilibrium can also be expressed using a series of
equations. Both the demand and supply curve can be expressed as equations.
Demand Curve is Qd = 22 – P
(Notice the negative sign in front the price variable, indicating a downward sloping
function)
Supply Curve is Qs = 10 + P
(Notice the positive sign in front of the price variable, indicating an upward sloping
function)
Equilibrium price The equilibrium condition is Qd = Qs
22 - P = 10 + P
12 = 2P or P = 6
Changes in supply and demand in a market result in new equilibria.
Movement of the demand curve from D1 (solid line) to D2 (dashed line) is a decrease
in demand. Such decreases are caused by a change in a nonprice determinant of
demand. With a decrease in demand there is a shift of the demand curve to the left
along the supply curve, therefore both equilibrium price and quantity decline

Movement of the supply curve from S1 (solid line) to S2 (dashed line) is an increase
in supply. Such increases are caused by a change in a nonprice determinant (for
example, the number of suppliers in the market increased or the cost of capital
decreased). With an increase in supply there is a shift of the supply curve to the right
along the demand curve, therefore equilibrium price and quantity move in opposite
directions (price decreases, quantity increases)

4.2. Shortages and Surpluses

Shortages and surpluses can only result because by having some sort of price controls in the market.
• Shortage (stockout) is caused by an effective price ceiling (the maximum price you can charge for
the product). For a price ceiling to be effective it must be imposed below the competitive
equilibrium price. when the quantity demanded exceeds, the quantity supplied
• Surplus (overstock) is caused by an effective price floor (minimum you can charge). For a price
floor to be effective it must be above the competitive equilibrium price. a level of an asset that
exceeds the portion used.

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 4.3. Types of competition
There are four types of competition in a free market system: perfect competition, monopolistic
competition, oligopoly, and monopoly.
• Under monopolistic competition, many sellers offer differentiated products—products that
differ slightly but serve similar purposes. By making consumers aware of product differences,
sellers exert some control over price.
• In an oligopoly (markets dominated by a small number of suppliers), a few sellers supply a sizable
portion of products in the market. They exert some control over price, but because their products
are similar, when one company lowers prices, the others follow.
• In a monopoly, there is only one seller in the market. The market could be a geographical area,
such as a city or a regional area, and does not necessarily have to be an entire country. The single
seller is able to control prices. Most monopolies falls into one of two categories: natural and
legal.
o Natural monopolies include public utilities, such as electricity and gas suppliers. They
inhibit competition, but they’re legal because they’re important to society.
o A legal monopoly arises when a company receives a patent giving it exclusive use of an
invented product or process for a limited time, generally twenty years

4.4. Supply Analysis

a supply curve describes how much of a good a supplier will choose to provide at each price. A firm’s
supply decision consists on two things-

4.4.1. Long run

The first is whether to compete in the market at all. We call any time horizon long enough to permit
entry and exit decisions the long run.

4.4.2. short-run
The second decision is the short-run choice of how much to produce in light of current market
conditions, given that the firm is in the market. decision about how much to supply in short run
starts with its costs

4.5. Fixed costs

are expenses that must be paid if a firm is open for business, regardless of the volume of goods
produced

4.6. Marginal costs

are costs that vary substantially with the level of production. Producing incremental units of output
leads to incremental increases in such costs. Marginal costs include not only cash costs but also any
non-cash opportunity costs of forgone alternatives

note: In the short run, fixed costs are unavoidable. Only marginal costs should affect short-run
supply decisions

5. Supply & Demand: Elasticities

5.1. The price elasticity

The price elasticity of demand is how economists measure the responsiveness of consumers to
changes in prices for a commodity. The relative proportions of the changes in price and the
respective quantities demanded are the responses of consumers and are referred to as the price
elasticity of demand. There are three methods that are used to measure the price elasticity of
demand –
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 5.1.1. The price elasticity coefficient (midpoints formula)
The elasticity coefficient is a number calculated using price and quantity data to determine how
responsive consumers are to changes in the price of a commodity. The elasticity coefficient may
be calculated in two distinct ways.
5.1.2. Point elasticity
is measuring responsiveness at a specific point along a demand curve.
5.1.3. The mid-point
The mid-point of the difference in the price and the mid-point in the difference of the
quantity numbers

5.2. Elastic demand

The value of that number provides the answer as to whether demand is price elastic or price
inelastic. Elastic demand means that the consumer’s quantities demanded respond to changes in
price with elastic demand the coefficient is more than one.
5.2.1. Price elasticity of demand
a small dip in price sparks a large surge in the quantity demanded is called price elasticity of demand
because demand stretches a great deal as price changes
Note: The price elasticity of demand is usually a function of the time period under consideration. In
the near term, an increase in the price of a product may have little effect on demand because it
takes time to develop substitutes and learn how to use them
5.2.2. Inelastic demand means
That the consumers' quantities demanded do not respond very much to changes in price; with
inelastic demand the coefficient is less than one or
An inelastic demand curve is steeper indicating that consumers buy nearly the same amount of the
good even if its price rises or falls significantly
5.2.3. Unit elastic demand means
that the consumers' quantity demanded respond proportionately to change in price; with unit elastic
demand the coefficient is exactly one

In the case of a perfectly elastic demand curve, In the case of perfectly inelastic demand
if producers raise the price of the product, consumers will buy exactly the same quantity
then they will sell nothing of a product without regard for its price.
Slope and elasticity are two different concepts. With linear demand curves, elasticity changes
along the demand curve, however its slope does not. Elasticity is concerned with responses in
one variable to changes in the other variable. The slope of the curve is concerned with values of
the respective variables at each position along the curve

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 Demand Curve and Total Revenue (total revenue = P x Q) Curve.
The total revenue curve in the bottom graph is plotted by multiplying price and quantity to
obtain total revenue and then plotting total revenue against quantity. In other words, moving
from left to right on the demand curve, as price and total revenue move in the opposite
direction demand is price elastic, and when price and total revenue move in the same direction
demand is price inelastic.
In general, price and total revenue will move in the same direction of the demand is price
inelastic (hence consumers are unresponsive in quantity purchased when price changes) and
move in opposite directions if price elastic (consumers’ quantities being responsive to price
changes).

5.3. The total revenue tests

Marginal revenue is the change in total revenue due to a change in quantity demanded. The total
revenue test relies on changes in total revenue (marginal revenue) to determine elasticity
1.1. If the change in total revenue (marginal revenue) is positive the demand is price elastic,
1.2. if the change in total revenue is negative the demand is price inelastic.
1.3. If the marginal revenue is exactly zero then demand is unit elastic.
The determinants of the price elasticity of demand are;
1.1. Substitutability of other commodities,
1.2. The proportion of income spent on the commodity,
1.3. Whether the commodity is a luxury or a necessity, and
1.4. The amount of time that a consumer can postpone the purchase.
Commodities that are viewed as luxuries typically have price elastic demand, and commodities that
are necessities have price inelastic demand.

5.4. Supply Analysis

The price elasticity of supply measures the responsiveness of suppliers to changes in price. The price
elasticity of supply is determined by the following time frames
5.4.1. Market period
The market period is defined to be that period in which the producer can vary nothing, therefore
the supply is perfectly inelastic
5.4.2. Short-run
The short-run is the period in which plant and equipment cannot be varied, but most other factors'
usage can be varied, therefore it depends on a producers capital - intensity as to how elastic supply
is at any particular point.

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 5.4.3. Long-run
The long-run is the period in which the producer can vary everything, therefore the supply is
perfectly elastic.
The more time a producer has to adjust output the more elastic is supply

Note: In the short run, fixed costs are unavoidable. Only marginal costs should affect short-run
supply decisions
5.5. Other Elasticities
There are three other standard applications of the elasticity of demand

5.5.1. The cross elasticity of demand

The cross elasticity of demand, the income elasticity of demand, and the interest rate elasticity of
demand

5.5.2. The income elasticity of demand

measures the responsiveness of the quantity demanded of a commodity to changes in consumers'
incomes

5.5.3. The interest rate elasticity of demand

Often interest rates will also present a limitation on a consumer’s quantity of demand for a
particular commodity

In purely competitive firms are price takers, and it is the imperfectly competitive firm that has a
pricing policy. What is often referred to as “pricing power”

6. Costs of Production
An economist's view of costs includes both explicit and implicit costs.

6.1. Explicit costs

are accounting costs

6.2. Implicit costs

are the opportunity costs of an allocation of resources.

Notes: In the market period, all costs are fixed costs (nothing can be varied). In the short-run, there
are both fixed and variable costs observed.

short-run cost structure is that fixed costs are those that must be paid whether the firm produces
anything or not. Variable costs are called variable because they increase or decrease with the level
of production.

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6.3. Marginal product
is the change in total product associated with a change in units of a variable factor of production.
Average product is total product divided by the number of units of the variable factor employed

6.4. The law of diminishing

The law of diminishing returns is the fact that as you add variable factors of production to a fixed
factor, at some point, the increases in total output begin to become smaller. At some point, that
further additions in the units’ variable factors to a fixed level of capital could actually reduce the
total output of the firm. This is called the uneconomic range of production

6.5. Calculate cost formulas

Total Cost (TC) = Variable cost (VC) + Fixed cost (FC)

Average Total Cost (ATC) = Total cost (TC)/ Quantity (Q)

Average Variable cost (AVC) = Variable cost (VC) / Quantity (Q)

Average Fixed cost (AFC) = Fixed cost (FC)/ Quantity (Q)

Marginal cost (MC) = ΔTC/ ΔQ; where Δ stands for change in.

• The fixed cost curve is a horizontal line.

• The variable cost curve has a positive slope because it varies with output
• Total cost curve has the same shape as the variable cost curve, but is above
the variable cost curve by a distance equal to the amount of the fixed cost.
This is because we added fixed cost (the horizontal line) to variable cost
(the positively sloped line).

MC < ATC, ATC is falling.

MC > ATC, ATC is rising.
MC = ATC, ATC reaches its minimum point
(break-even point)
MC = AC, then AC is constant.
MC cuts AC at its lowest point
D = MC => The monopolist restricts output

6.6. The long-run average total cost curve (LRATC)

The long-run average total cost curve (LRATC) is a mapping of all minimum points of all possible
short-run average total cost curves (allowing technology and all factors of production (i.e., costs) to
vary).

Economies of scale are benefits obtained from a company becoming large and diseconomies of scale
are additional costs inflicted because a firm has become too large.

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 The LRATC curve reaches its minimum, this is called the minimum efficient scale (size of operation).
Minimum efficient scale is the smallest size of operations where the firm can minimize its long-run
average costs
7. Type of market
7.1. Perfectly competitive
Perfectively comitative markets have the following characteristics
• Identical sellers
• Free entry
• Free exit
Note: In the product market, the two extremes are perfect competition and pure monopoly
7.2. pure monopoly
7.3. monopolistically
7.4. oligopoly
The assumptions in pure
competition are
• There is atomized
competition (a large
number of very small
suppliers and buyers
relative to the market)
• There is complete
freedom of entry and exit
into and from this market
• There is no nonprice
competition
• Suppliers offer a
standardized product
• Firms in this industry
must accept the price
determined in the
industry
A purely competitive firm
sells its output at the one
price determined in the
industry, price does not
change as the quantity sold
increases.
The profit maximizing rule
is that a firm will maximize
The assumptions in The assumptions in The assumptions in
pure monopoly are monopolistically competitive model of oligopoly
industry
• There is one seller • A relatively small number • There are few
that supplies a large of sellers compared to sellers (generally a
number of pure competition, but this dozen or less),
independent buyers number can still be large, these firms often
• Entry and exit into in some cases a few collude or implicitly
this market is hundred independent cooperate through
completely blocked sellers. such practices as
• The firm offers • Pricing policies exist in price leadership
unique product these firms • Entry into this
• There is nonprice • Entry into this market is market is generally
competition (mostly generally somewhat difficult
public information difficult • There is normally
advertising) • There is substantial very intensive non
• This firm is a nonprice competition, price competition in
constrained price mostly designed to create an attempt to
dictator. product differentiation, at create product
Example – Indian least some of which is differentiation,
railway some other spurious. often spurious.
government control Example- computer Example -brewing
organizations. manufacturers, software industry, segments of
manufacturers, most retail the fast-food industry,
industries, and liquor and airplane
distillers manufacturers
MR = Q is the point on • •
the demand curve of
unit price elastic
demand
monopolist decides
how much to produce
using the profit
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 profits where marginal cost
(MC) is equal to marginal
revenue (MR).
If a firm produces at a
quantity in excess of where
MC = MR, the firm adds
more to its costs than it
receives in revenues.
Therefore the optimal, or
profit maximizing level of
output is exactly where MC
= MR
maximizing rule; or
where MC = MR.
A monopolist can
make an economic
profit. An economic
profit is that margin
above average cost
which is in excess of
that necessary to
cover the next best
alternative allocation
of the firm’s assets.
The monopolist
produces where MC =
MR (where MC
intersects MR), but
the price charged is all
the market will bear,
that is, the price on
the demand curve
that is immediately
above the intersection
of MC = MR

Price discrimination is
where you charge a
different price to
different customers
depending on their
price elasticity of
demand

7.5. Keywords
7.5.1. Economic profit
An economic profit is that margin above average cost which is in excess of that necessary to cover
the next best alternative allocation of the firm’s assets.

7.5.2. Price discrimination

Price discrimination is where you charge a different price to different customers depending on their
price elasticity of demand

7.5.3. Regulated Monopoly

Regulated Monopoly - The purpose of the rate regulation was to ensure that the public would not
suffer price gouging as a result of the monopoly position of the firms. monopolist should be
constrained to charge a price where MC = D or the social optimum

If we are concerned about consistently and reliably having the product of the monopolist available,
at a reasonable price, then it might be more sensible to regulate the monopolist to charge a price at
where ATC = D, or the fair rate of return.

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 The potential prices at which a monopolist could be regulated, and the potential results of those
price levels, is called the dilemma or regulation.

8. Quantitative Decision-Making
8.1. Analytics
8.1.1. Descriptive analytics
(What happened)- Descriptive analytics is the interpretation of historical data to better understand
changes that have occurred in a business

8.1.2. Diagnostic analytics

which answers the question, “Why did this happen?”

8.1.3. Prescriptive analytics

What do we need to do to achieve this. It involves the use of technology to help businesses
make better decisions through the analysis of raw data

8.1.4. Predictive analytics

Predictive, which answers the question, “What might happen in the future?”

8.2. Relevant cost

Relevant cost is the cost all the different cost except the fixed cost.

Relevant cost = Total cost – fixed overhead cost

8.3. Bottleneck
Bottleneck is the state in the system that drive overall capacity. The 100% utilization of a resource or
a person.

8.4. Overhead cost

Overhead cost can be divided into 2.

8.4.1. Fixed cost

Fixed cost are expenses that must be paid if a firm is open for business, regardless of the volume of
goods produced

8.4.2. Variable cost

Decision making – production plan. How many units you are producing.

8.5. Optimization problem

Any optimization problem will have 3 pillars

• Decision variable – Relate to the action point. What action you have to take?
• Object function
• Constraints

8.6. Sensitivity report

Sensitivity report – show the optimized resource outcome. The reports contain 2 sections

• Variables
o Final value – the solution or the result
o Objective Coefficient – profitability
o Allowable Increase and Allowable decrease – This value shows optimal production
plan will remain unchanged if profitability belongs to the range.
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 Range: [Objective Coefficient – Allowable Decrease, Objective Coefficient + Allowable
Increase]
• Constraints
o Constraints Right Hand side – shows the full capacity of a resource in production
o Final Value – Resource consumed in the production
o Shadow price – A marginal worth of resource. The shadow price of the bottleneck
resource will be non-zero (or greater then >0). Non-bottleneck resource shadow
price will be zero.

9. Forecasting
Forecasting is a method to estimate the future variables from a business perspective. Forecasting
can never be absolute rather they represent an approximate image of how the variables might
behave in the future.

9.1. Forecasting technique

9.1.1. Quantitative technique
Variables such as favourite music genre, taste preference, colour preference. Prevalent techniques
under qualitative technique are

9.1.1.1. Delphi method

9.1.1.2. Market research using survey
9.1.1.3. Sales Estimates & Executive Opinion
9.1.2. Qualitative technique
Involving variables which can be numerically represented and measured. For example weight,
height, length, depth

Quantitative methods can be divided into 2 parts

9.1.2.1. Time series

Time series This is based on historical data. It shows how the data behaves with respect to the time.
Identify these patterns to forecast. In time series, time is on x axis and variable is on y axis.

Type of time series plots and forecasting technique

time series plots forecasting technique

Horizontal Pattern – means no Moving average, Weighted moving
patterns in the data average, exponential smoothing
Trend Pattern Regression
Seasonal Pattern and Cyclical Seasonality factor based,
Pattern Regression
Trend and Seasonal Pattern Regression, Holt
Horizontal + Trend + Seasonal Holt

9.1.2.2. Causal method

Causal method comes under as predictive modelling or diagnostic modelling. Identify the cause why
it is happening, what is the feature of product, does review and rating matter etc. collect this data
and predict. Cause methods get refine over the time.

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9.2. Evaluating Forecasts
9.2.1. Error
o Forecast error et (error at time period t)
et = Ft – Dt

9.2.2. Mean absolute deviation (MAD):

9.2.3. Mean squared error (MSE):

9.2.4. Mean absolute percentage error (MAPE):

10. Ethics and business

Cosmo centric: Literally it means that the Cosmos is placed at the centre, thus a person is studied in
reference to Cosmos.

Theocentric: A person's study is done in relationship with God or Absolute Being.

Anthropocentric: It implies that a person is at the centre, he is the point of departure of his own
study.

The intrinsic value (inherent) of something is said to be the value that that thing has “in itself,”
example - Playing cards because you enjoy the challenge.

Extrinsic value (Instrumental) is value that is not intrinsic. Example Playing cards to win money.
money has an instrumental value

A vision of Utopia - The idea of a perfect world, A free and peaceful society, perfection in law and
politics

Dystopia - an imagined state or society in which there is great suffering or injustice

Goal of Ethics

• Planet - Sustainability
• People - Health, Education, Development, Human Rights, Opportunities etc.
• Profit - Inclusive and sustainable growth

Ethical questions in business

• Individual – micro- the rules of fair exchange between two individuals

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 • Corporate - molar- questions that concerns the role of corporation in society and role of
individual in the corporation
• Systemic– macro- the institutional or cultural rules of commerce for an entire society/the
world of business

Law in general: Thomas Aquinas - a certain rule and measure of acts whereby man is induced to act
or is restrained from acting

Kinds of Law

• Eternal law is identical to the mind of God as seen by God himself.

• Divine law is derived from eternal law as it appears historically to humans, especially
through revelation
o Old Law - commands conduct externally - reaches humans through their capacity
for fear - Law promised earthly rewards (social peace and its benefits)
o New Law -- commands internal conduct - reaches humans by the example of divine
love -- promises heavenly reward
• Human law as what we sometimes nowadays call positive law, the laws actually enacted and
put in force in our human communities

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