ECO 101

What is Economics?
- Economics is like a giant puzzle that helps us understand how people, businesses,
and governments make choices about using resources. These resources could be
money, time, land, or even skills.
- Economics is the study of scarce resources that have alternative uses.
- Imagine you have some pocket money but also want to buy a toy. You must
decide whether to spend all your pocket money on the toy or save some for later.
That's like economics – deciding how to use what you have wisely.

- Everyone wants many things. But there is a difference between want and
demand. Want is just a wish. To fulfill his wants in economics, called “Resources.”
For Example, If a chair has any use or fulfills any demand, it will be a resource.

Goods and Bads

- Economics talks about good and evil. Good is anything that gives a person utility
or satisfaction. Here is a partial list of some goods: a computer, a car, friendship,
and love. It can be tangible and intangible.
- A bad is something that gives a person disutility or dissatisfaction. If the flu gives
you disutility or dissatisfaction, it is terrible. Like fever, pollution.
- People give money to get goods and get rid of bad things like you are giving
1000 money to buy a PC, and you have a fever, and you are giving money to the
doctor so that he can give the medicine for the fever.
- A thing can be good for one and bad for others. Some people like cigarettes, and
some do not.

Resources
- In economics, resources refer to the various inputs or factors of production used
to produce goods and services.
 - Resources can be divided into four parts

The land is the natural resources used for production, like oil, coal, fields, water,
and air. If nothing (produces nothing, not even cow’s food), then there is no recourse
in Economics. Mainly, all the natural resources are called land when they are used for
production.

Labor – The physical and mental attributes of people used for production, like the
work of day laborers and doctors.

Capital – Anything that is not natural but artificial, made of resources used for
production, for example, money, furniture, buildings, factories, machinery, tools, etc.

Entrepreneurship – A human being who organizes land, labor, and capital for
production and is the risk taker for production. For example, a factory owner. If one
only contains but does not invest in it, he is only labor.

Scarcity –

- Scarcity is a situation where unlimited wants compared to limited resources.

- The main job is to solve the problem of scarcity. There will always be scarcity in
the world. Economics is called the science of scarcity.

Effects –

1. It forces us to make choices:

We must decide what's most important because we can't have everything we want. For
example, if you only have enough money to buy a new video game or pair of shoes, you
must choose which one you want more.

2. It uses rationing devices to allocate scarce resources:

Rationing devices are ways we decide who gets what when there's not enough. For
example, in a classroom with only one book, the teacher might let each student have the
book for one day so everyone gets a turn.

3. It leads to competition among people:

When resources are limited, people may compete to get what they want. For instance, if
there's only one job opening, many people might apply and compete against each other
to get hired.
Opportunity Cost:

- It is the next best thing you could have done with your time or money but cannot
do because of your choice.
- Opportunity cost can increase and decrease a person’s behavior.

- Imagine you have $20 to spend, and you're trying to decide between buying a
new video game or going out to dinner with friends.

- If you spend $20 on the video game, your opportunity cost is dinner with friends.
You're giving up the experience of dining out and socializing with your friends in
favor of the video game.

- Now, let's say your friends decide to treat you to dinner, so you no longer must
spend money on that. In this case, the opportunity cost of buying the video game
decreases because you're not giving up the dinner with friends. This might make
you more likely to buy the video game since the alternative (going out to dinner)
doesn't require spending your money.

- Opportunity cost is higher. You will not make the choice.

- Opportunity cost is lower. You will make the choice.

Marginal Benefits:

- "Marginal benefits" in economics refers to the additional satisfaction gained from

consuming or producing one more unit of a good or service

NO OF GLASS TOTAL BENEFIT EXTRA/ MARGINAL

BENEFIT
1 10 10
2 17 7
3 20 3
4 20 0
5 17 -3

Marginal Benefits are not equal to total benefits.

The marginal Benefits curve is always downward.
Marginal cost :

- "Marginal cost" in economics refers to the additional cost of producing one more
unit of a good or service. It's like asking, "How much does it cost to make just
one more?"
- For example, let's say you're running a lemonade stand. The marginal cost is the
extra money you must spend on ingredients and supplies to make one more cup
of lemonade.

NO OF GLASS TOTAL COST MARGINAL COST

1 10 | 10 10 |
2 10 | 23 10 | 13
3 10 | 38 10 | 15
4 10 | 58 10 | 20
5 10 | 83 10 | 25

EBiciency :

- Efficiency in economics is about ensuring we use our resources wisely to get the
most benefit.
- When marginal benefit = marginal cost, there is the most efficiency.

Unintended eBect :

- "Unintended effects" in economics refer to outcomes resulting from an action or

policy that was not initially anticipated or planned for. These effects can be either
positive or negative and often happen unexpectedly.
 - For example, let's say a government tax sugary drinks to reduce consumption and
improve public health. The intended effect might be to decrease the
consumption of sugary drinks and promote healthier choices. However, an
unintended effect could be that people buy more diet sodas or switch to other
unhealthy beverages with high levels of artificial sweeteners, which may not
necessarily improve public health.

1. Positive Economics:
Positive economics deals with facts and what can be observed. It describes how
the economy works without adding personal opinions or judgments.
Example: "The unemployment rate is 5%." This statement is based on observable
data and doesn't involve personal opinions. It's just stating a fact about the
economy.
2. Normative Economics:
Normative economics involves opinions and judgments about what should be
done in the economy. It's about expressing what people think is good or bad, fair
or unfair.
Example: "The government should increase spending on education." This
statement expresses a viewpoint about what action should be taken regarding
education funding. It involves an opinion about what's best for the economy.

Exchange or trade is giving one thing in return for another. It's a fundamental concept
in economics where individuals, businesses, or countries swap goods, services, or
resources with each other. It only occurs when one expects to be better off after the
trade than before the trade.

Imagine you have an apple, and your friend has an orange. You both want to try
something different, so you decide to trade. You give your friend the apple, and they
give you the orange in return. This act of swapping one item for another is an exchange
or trade.

1. Microeconomics:
Microeconomics is about looking at small parts of the economy. It focuses on
how individuals and businesses decide what to buy, how much to produce, and
how to use their resources.
 Example: Microeconomics might study how a family decides to spend its money,
how a company sets its prices, or how people choose to save or invest their
income.
2. Macroeconomics:
Macroeconomics is about looking at the economy as a whole. It deals with big-
picture issues like overall production levels, unemployment rates, inflation, and
economic growth.
Example: Macroeconomics might study the factors that influence a country's
overall economic output, such as government policies, international trade, or the
behavior of financial markets.

Production Possibility Frontier:

- Two-dimensional graph that shows how many ways production can be produced.
- At a time, how many combinations can a maximum of two production
combinations a country make using all its resources?
- IN PPF, after using 100% recourses, there is no unlimited production. So there is
scarcity.
- There is also a choice: you can produce a gun or butter more.
Finding opportunity cost :

- To move from A to B
- We get 4 guns by giving up 1 pound of butter
- Therefore, we get 1 gun by giving up ¼ = 0.25 butter

- To move from C to D
- We get 2 guns by giving 3 pounds of butter
- Therefore, we get 1 gun by giving up 3/2 = 1.5 pounds of butter.

- To move from D to E
- We get 2 guns by giving 4 pounds of butter
- Therefore, we get 1 gun by giving up 4/2 = 2 pounds of butter.
Thus, we see that we want to get more guns, and the opportunity cost of
getting them increases from 0.25 to 1.5 to 2

Increasing Opportunity Cost

Quantity of book

Quantity of pen
Bound Outward PPF
 Decreasing Opportunity Cost

Bound Inward PPF

Quantity

Of

Banking

Service

Quantity of medical service

Constant PPF
 Economic Concepts With PPF

Scarcity :
Scarcity is a situation where there are unlimited wants but limited resources. The
PPF limits what we can achieve by giving our total resources. So, it
Shows scarcity.

Choose :
There are different combinations of services and goods we can choose from. If we
decide guns more, we must lose some bread, and if we select bread more, we must lose
some firearms.

Opportunity Costs:
The downward slope of the PPF represents the opportunity cost concept. Each
production choice is associated with an opportunity cost.

Productive Efficiency:
An economy is productively efficient if it produces the maximum output with
given resources and technology. All the points A to F are productively efficient points.

Productive inefficiency
This is when resources and technology are not thoroughly and efficiently used,
and more of one good can be produced without giving up another good. The point U is
productively inefficient. All the points inside the PPF are productive inefficiency.
Unemployed resources:
Point U is an example of a resource not being fully used for production.

Economic Growth:
The increase in the productive capacities of an economy.
This can occur due to
a) Increase in the number of resources
b) Advancement in technology This will shift the PPF outward
This will shift the PPF outward.

Exchange or Trade
We are giving up something for something else. It occurs only when we expect to be
better off after trade than before trade.

Terms of Trade vs Trade

The rate of exchange of one good or service for another. How much of something is
traded for how much of something else.

On the other hand, trade is the giving up of something for something else.
 Transaction costs

- Costs incurred while making a trade. Costs are associated with the time and effort.
Needed to search out, negotiate, and make a trade.
- They determine whether a potential trade will become an actual trade.
- Lowering transaction costs can turn a potential trade into an actual trade
- One of the roles of the entrepreneur is to try to lower transaction costs
- Higher transaction costs lower the change of trade happening.

Gains from trading

- Individuals can be better off by producing and trading goods and services they have a
comparative advantage over.

- A person has a comparative advantage at producing something if they can make it at a

lower cost than anyone else (opportunity cost is lower).

- Comparative advantage ≠is being best at something. Individuals gain from

specializing. This reduces costs and increases profit.

Absolute Advantage :

Something is better. But it does not mean there cannot be trade happen.
Absolute advantage is a concept in economics that refers to a situation where one
person, firm, or country can produce a good or service using fewer resources than
another. In simpler terms, it means being better at making something than others.

Let's say there are two countries, Country A and Country B, producing two goods: cars
and computers. If Country A can make cars and computers using fewer resources (like
labor, materials, and time) than Country B, then Country A has an absolute advantage in
car and computer production.

Comparative Advantage :

Wheat Rice
RAJ 20 30
ROHIT 20 10
It's about looking at what someone or someplace can do best compared to others, even
if they could be better at doing everything.
For Raj,
For wheat production:
To get 20 kg of wheat, the opportunity cost is 30 kg of rice.
The opportunity cost to get 1 kg wheat is 30/20 = 1.5kg rice.

For Rohit,
For wheat production:
To get 20 kg of wheat, the opportunity cost is 10 kg of rice.
The opportunity cost to get 1 kg wheat is 10/20 = 0.5kg rice.

Rohit should produce wheat as he can produce wheat at a lower opportunity cost.

Market :
A market is any place where buying and selling things take place.
Even giving service and taking service take place.
There are two things in the market: 1. Buyer and 2.Seller

Demand :
The way buyers express to buy something is called demand.
Supply :
The way sellers express to sell something at a different price is called supply.

Demand:
Want is not equal to demand.
Want is just a wish and desire.
Demand is the willingness and ability of buyers to purchase different kinds of goods and
services at different prices during a specific period.

CETERIS PARIBUS is a Latin term that means nothing else changes or everything
remains constant.
There are four ways to express the law of demand.
The first one is in words:
LAW OF DEMAND :
The law of demand is the way demand works. The law of demand states that as the price
of the good rises, the quantity demand for the goods falls, and as the cost of the
product falls, the quantity demand for the goods rises, CETERIS PARIBUS.

The second one is in symbols :

P↑ Q↓ CETIRUS PARIBUS
Q↑ P↓ CETIRUS PARIBUS

The third one is in a demanding schedule :

The last one is as a demand curve :

Why Does Quantity Demand Go Down as Price Goes Up?

1. People buy less of something when its price increases because they often switch
to cheaper alternatives.
2. Also, as people consume more of something, they get less satisfaction from each
additional unit, so they're only willing to buy more if the price is lower. This is
called the law of diminishing marginal utility.
1. Individual demand curve vs market demand curve.
- An individual demand curve shows how much of a product one wants at
different prices.
- A market demand curve shows how much of a product everyone wants at
different prices.
- Add the quantities all individuals demand at each price to get a market demand
curve.
- You can draw a market demand curve by plotting these totals on a graph.

Change is the quantity demanded, and change is demand.

Change in Quantity Demanded: This happens when the price of a product

changes, leading to a change in the quantity that consumers want to buy. It's
shown by moving along the existing demand curve. For example, if ice cream
prices decrease, people will buy more because it's cheaper, but their desire for ice
cream has stayed the same.
2. Change in Demand occurs when something other than price affects how much
consumers want to buy at every price. It's shown by shifting the entire demand
curve. Factors like changes in income, tastes, expectations, or the prices of related
goods can cause this. For instance, if people suddenly become more health-
conscious, they might buy less ice cream even if the price remains the same.
Demand is connected to two things.
1. Price [Movement Factor]
2. All the things without price [Shift Factor]

Movement Factor :
Due to price movement along the same demand curve.[up and down movement]. This is
called a change in quantity demanded due to the price.

Shift Factor :
During shift factors, prices are constant.
When prices are identical, but the demand curve changes, it means a shift called a
change in demand.
Reasons :

Income :
For Normal Goods :
As a person's income changes, it may increase or decrease; his demand for a particular
good will rise, fall, or remain the same.

For example, Cloth

Inferior :
As a person's income changes, his demand for inferior goods changes. If income
increases, inferior goods decrease, and vice versa

Example: Public Transport

Neutral goods :
As a person's income changes, his demand for neutral goods remains constant.
Y ↑ QD^-[BAR]
Y ↓ QD^-[BAR]

PREFERENCES :
People’s preferences affect the amount of goods they want to buy
at a particular price. A preference change in favor of a good shifts the demand curve
rightward. A change in preferences away from the good shifts the demand curve
leftward.
For example, if people begin to favor Elmore Leonard's novels to a greater degree than
previously, the demand for his novels increases, and the demand curve shifts rightward.

NUMBER OF BUYERS :
The demand for a good in a particular market area is related
to the number of buyers in the area: more buyers, higher demand; fewer buyers, lower
demand.
EXPECTATIONS OF FUTURE PRICE :
Buyers who expect the price of a good to be
higher next month may buy it now, thus increasing the current (or present) demand for
the good. Buyers who expect the price of a good to be lower next month may wait until
next month to buy it, thus decreasing the current (or present) demand for the good.

For example, suppose you are planning to buy a house. One day, you hear that house
prices are expected to drop in a few months. Consequently, you decide to delay your
purchase for a while. Alternatively, you can purchase now if you hear that prices are
expected to rise in a few months.

PRICES OF RELATED GOODS :

There are two types of related goods: substitutes and
complements. Two goods are substitutes if they satisfy similar needs or desires. For
many people, Coca-Cola and Pepsi-Cola are substitutes. If two goods are substitutes, as
the price of one rise (falls), the demand for the other rises (falls). For instance, higher
Coca-Cola prices will increase the demand for Pepsi-Cola as people substitute Pepsi for
the higher-priced Coke
Pc ↑ Qp ↓
Qp ↑ Pc ↓

Two goods are complements if they are consumed jointly. For example, tennis rackets
and tennis balls are used together to play tennis. If two goods are complements, as the
price of one rises (falls), the demand for the other falls (rises). For example, higher tennis
racket prices will decrease the demand for tennis balls,
Pt ↑ Qr ↓

Law of demand: why does it hold?

- As a product's price is high, the opportunity cost per unit becomes high. For this, the
demands go down

- If the price increase up the marginal benefit increases for that demands goes down.
Supply: The willingness and ability of the seller to sell some goods at different prices at
different quantities for a certain time are called supply.

Law of supply: The law of supply states that as the price of a good rises, the quantity
supplied of the good rises, and as the price of a good falls, the quantity supplied of the
good falls, ceteris paribus. Most of the time supply curve upward graph.

Exception : Some times supplies remains constant there is no difference of supply due to price.

Why Most Supply Curves Are Upward Sloping :

Supply curves are typically upward sloping because of the law of diminishing marginal
returns. This means that as producers make more of a good, the additional output they
gain from each additional unit decreases. When prices rise, it becomes more profitable
for producers to make more of the good, so they increase their supply. In simpler terms,
higher prices mean higher profits, which motivates producers to supply more of the
good to the market.
Sure, imagine you're running a lemonade stand. As you make more and more
lemonade, each additional pitcher becomes a bit harder to produce. You might run out
of lemons or find it takes longer to squeeze them. This is the law of diminishing returns
– the more you produce, the less efficient each additional unit becomes.

Now, let's say the price of lemonade suddenly goes up. You realize you can make more
profit for each pitcher you sell. So, you're motivated to make extra lemonade because
you'll earn more money for each unit you sell. This is why supply curves slope upwards –
higher prices mean more profit, encouraging producers to supply more goods to the
market.
Supply Curve vs Market Supply Curve : Supply curve means individual sellers supply
curve and market supply curve means all the totals sellers supply in market.

Supply is connected with two things.

1. Price [Change in quantities supplied]
2. All the things without price [Change in supply]

Movement Factor : Due to price movement along the same supply curve.[up and down
movement]. This is called a change in quantity supplied due to the price.
Shift Factors: During shift factors, prices are constant.
When prices are identical, but the supply curve changes, it means a shift called a change
in supplied.

Factors that cause the supply curve to shift include:

1. Prices of Relevant Resources: If the cost of resources needed for production

decreases, like wood for making doors, producers will make more of the product.
For example, if the price of wood falls, door producers will produce more doors
because it's cheaper to do so. So, if it increases, supply will be low because the
price is the same, and if it is low, supply will be high.

2. Technology: Improvements in technology can make production more efficient,

reducing costs and increasing supply. For instance, if advancements allow farmers
to grow corn using the same resources, they'll supply more corn. More
technology improves the supply we will get.

3. Prices of Other Goods: Changes in the price of one good relative to another can
affect production. If the cost of corn rises compared to wheat, farmers might
switch from wheat to corn production.

4. Number of Sellers: If more producers enter the market, supply increases; if some
leave, supply decreases curve shifted to the right.

5. Expectations of Future Price: If producers expect prices to rise, they may hold
back supply now to sell later at a higher price. For instance, if oil producers
 anticipate higher prices next year, they might now withhold oil from the market.
More expectations of higher prices in the future mean less supply will be in the
market.

6. Taxes and Subsidies: Taxes increase production costs, reducing supply, while
subsidies decrease costs, increasing supply. For example, a subsidy for corn
production would lead to more corn being supplied. Taxes' high supply will be
less and shift to the left. Subsidies like government help with money or without
money will decrease the product cost it will increase supply

7. Government Restrictions: Government actions, like import quotas or licensure

requirements, can limit supply. For instance, import quotas on foreign goods
reduce their supply in the domestic market. So more restrictions less supply shift
to left.

Equilibrium: This refers to the position of the rest in the market. It refers to a point
where supply is equal to demand. It is point and position where buyer and seller equally
happy.
It happened where Qd=Qs
Equilibrium price is the price at which the quantity demanded by consumers and the
quantity that firms are willing to supply of a good or service are the same.
At P3 Qs>Qd it means excess supply , it will reduce price.
At P2 Qs<Qd it means excess demand, shortage, increase of price

Maximum Price & Minimum Price :

The maximum price should be managed by the customer.
Minimum price should be managed by the seller.

Buyer Ability Seller Ability

Customer surplus and producer surplus are concepts used in economics to measure the
benefits received by consumers and producers in a market.

1. Customer Surplus: This is the extra benefit or value that consumers receive when
they purchase a good or service at a price lower than the maximum price they are
willing to pay. It's essentially the difference between what consumers are willing
to pay for a product and what they actually pay.
For example, if a consumer is willing to pay $50 for a product but buys it for $30,
their consumer surplus is $20 ($50 - $30).
2. Producer Surplus: On the other hand, producer surplus is the extra benefit or
profit that producers receive when they sell a good or service at a price higher
than the minimum price they are willing to accept. It's the difference between the
price at which producers are willing to supply a product and the price they
actually receive.
For instance, if a producer is willing to sell a product for $20 but manages to sell
it for $40, their producer surplus is $20 ($40 - $20).
ABPE Consumer Surplus
CBPE Producer Surplus
In economics, price floors and price ceilings are government-imposed limits on the
prices of goods and services.

1. Price Floor: A price floor is the minimum price set by the government for a
particular good or service. It's designed to ensure that the price doesn't fall below
a certain level, typically to protect producers. When a price floor is set above the
equilibrium price (the point where supply equals demand), it creates a surplus
because suppliers are willing to supply more at the higher price than consumers
are willing to buy. This surplus can lead to inefficiency in the market.
2. Price Ceiling: Conversely, a price ceiling is the maximum price set by the
government for a particular good or service. It's implemented to ensure that the
price doesn't rise above a certain level, often to protect consumers. When a price
ceiling is set below the equilibrium price, it creates a shortage because
consumers demand more at the lower price than suppliers are willing to supply.
This shortage can also lead to market inefficiency.

Price floor is upward

Price floor helps Seller
Prrice ceiling helps buyer
● Case (e). Demand rises (the demand curve shifts from D1 to D2), and supply falls
(the supply curve shifts leftward from S1 to S2) by an equal amount. As a result,
the equilibrium price rises from P1 to P2, and the equilibrium quantity remains
constant at 10 units.

●● Case ( f). Demand falls (the demand curve shifts leftward from D1 to D2), and
supply rises (the supply curve shifts rightward from S1 to S2) by an equal amount.
As a result, the equilibrium price falls from P1 to P2, and the equilibrium quantity
is constant at 10 units.

●● Case (g ). Demand rises (the demand curve shifts rightward from D1 to D2) by a
greater amount than supply falls (the supply curve shifts leftward from S1 to S2).
As a result, the equilibrium price rises from P1 to P2, and the equilibrium quantity
rises from 10 to 12 units.

Case (h). Demand rises (the demand curve shifts rightward from D1 to D2) by a
smaller amount than supply falls (the supply curve shifts leftward from S1 to S2).
The equilibrium price rises from P1 to P2 and the equilibrium quantity falls
from 10 to 7 units.