Economics of IT Industries Prof.

Ankita Bawane
MBA ( Finance & Marketing )

What is Economics?
Economics is not only a subject but also a regular practice in every individual's life. It is a
way of balancing the financial inputs and outputs. Whether it is a small family or large
family, small business firm or a big organization, and individuals pocket money, etc.
whatever it is one should plan before the month or count at the end of the month or year. This
is what economics is trying to balance the unlimited requirements with limited resources.

Economics is the science of analyzing the production, distribution, and consumption of

goods and services. In other words, what choices people make and how and why they make
them when making purchases.
The study of economics can be subcategorized into microeconomics and
macroeconomics. Microeconomics is the study of economics at the individual or business
level; how individual people or businesses behave given scarcity and government
intervention. Microeconomics includes concepts such as supply and demand, price elasticity,
quantity demanded, and quantity supplied. Macroeconomics is the study of the performance
and structure of the whole economy rather than individual markets. Macroeconomics includes
concepts such as inflation, international trade, unemployment, and national consumption and
production.

Difference between Micro & Macroeconomics

“Economics is the science which studies human behaviour as a relationship
between given ends and scarce means which have alternative uses.”

Top 7 Difference Between Microeconomics And Macroeconomics

Economic is a study about how individuals, businesses and governments make choices on
allocating resources to satisfy their needs. These groups determine how the resources are
organised and coordinated to achieve maximum output. They are mostly concerned with the
production, distribution and consumption of goods and services.
Economics is divided into two important sections, which are: Macroeconomics &
Microeconomics
Macroeconomics deals with the behaviour of the aggregate economy and Microeconomics
focuses on individual consumers and businesses.

What is Microeconomics?
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
Microeconomics is the study of decisions made by people and businesses regarding the
allocation of resources and prices of goods and services. The government decides the
regulation for taxes. Microeconomics focuses on the supply that determines the price level of
the economy.
It uses the bottom-up strategy to analyse the economy. In other words, microeconomics tries
to understand human’s choices and allocation of resources. It does not decide what are the
changes taking place in the market, instead, it explains why there are changes happening in
the market.
The key role of microeconomics is to examine how a company could maximise its production
and capacity, so that it could lower the prices and compete in its industry. A lot of
microeconomics information can be obtained from the financial statements.
The key factors of microeconomics are as follows:

 Demand, supply, and equilibrium

 Production theory
 Costs of production
 Labour economics
Examples: Individual demand, and price of a product.

What is Macroeconomics?
Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises
itself with the economy at a massive scale, and several issues of an economy are considered.
The issues confronted by an economy and the headway that it makes are measured and
apprehended as a part and parcel of macroeconomics.
Macroeconomics studies the association between various countries regarding how the
policies of one nation have an upshot on the other. It circumscribes within its scope,
analysing the success and failure of the government strategies.
In macroeconomics, we normally survey the association of the nation’s total manufacture and
the degree of employment with certain features like cost prices, wage rates, rates of interest,
profits, etc., by concentrating on a single imaginary good and what happens to it.
The important concepts covered under macroeconomics are as follows:

1. Capitalist nation
2. Investment expenditure
3. Revenue

Examples: Aggregate demand, and national income.

 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )

Microeconomics Macroeconomics

Meaning

Microeconomics is the branch of Economics Macroeconomics is the branch of Economics that

that is related to the study of individual,
household and firm’s behaviour in decision
making and allocation of the resources. It
comprises markets of goods and services and
deals with economic issues.
deals with the study of the behaviour and
performance of the economy in total. The most
important factors studied in macroeconomics involve
gross domestic product (GDP), unemployment,
inflation and growth rate etc.

Area of study

Microeconomics studies the particular market Macroeconomics studies the whole economy, that
segment of the economy covers several market segments

Deals with

Microeconomics deals with various issues like Macroeconomics deals with various issues like
demand, supply, factor pricing, product pricing, national income, distribution, employment,
economic welfare, production, consumption, general price level, money, and more.
and more.

Business Application

It is applied to internal issues. It is applied to environmental and external issues.

Scope

It covers several issues like demand, supply, It covers several issues like distribution, national
factor pricing, product pricing, economic income, employment, money, general price level, and
welfare, production, consumption, and more. more.

Significance

It is useful in regulating the prices of a It perpetuates firmness in the broad price level,
product alongside the prices of factors of and solves the major issues of the economy like
production (labour, land, entrepreneur, deflation, inflation, rising prices (reflation),
capital, and more) within the economy. unemployment, and poverty as a whole.

Limitations
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )

It has been scrutinised that the misconception of

It is based on impractical presuppositions,
composition’ incorporates, which sometimes fails
i.e., in microeconomics, it is presumed that
to prove accurate because it is feasible that what
there is full employment in the community,
is true for aggregate (comprehensive) may not be
which is not at all feasible.
true for individuals as well.

What Is The Law of Demand?

The law of demand is the concept of economics. The prices of the goods or services and their
quantity demanded are inversely related when the other factors remain constant. In other
words, when the price of any product increases, then its demand will fall, and when its price
decreases, its demand will increase in the market.

This happens because of the concept of the diminishing marginal utility which
states marginal utility of the goods or service declines when there is an increase in its
available supply, i.e., the consumer uses first units of good purchased to serve their need
which they think is most urgent over the less urgent demands in their behaviour

The Law of Demand Overview

The law of demand is a fundamental concept in economics that describes the relationship
between the price of a product and the quantity of that product demanded by consumers. In
the field of economics, demand refers to the amount of a particular good or service that a
consumer is able and willing to buy at various prices within a specific time frame. It is
important to note that while desire may involve wanting to buy a product, demand
specifically requires both the desire and the ability to pay for it. A consumer's desire to
purchase a product is not equivalent to their demand for it, as demand requires both
willingness and purchasing power.

Understanding the Law of Demand

 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
The Law of Demand also referred to as the First Law of Purchase, asserts that when all
other factors are held constant or ceteris paribus, the price and quantity demanded of a
commodity have an inverse relationship. In other words, as the price of a product increases,
the quantity demanded of it will decrease, and vice versa. When the price of a product
decreases, consumers are able to purchase more of that product with their limited budget,
leading to an increase in demand. Conversely, when the price of a product increases,
consumers are forced to purchase less of that product, leading to a decrease in demand.
The relationship between price and quantity demanded can be illustrated using a demand
curve. A demand curve is a graphical representation of the relationship between the price of a
product and the quantity of that product demanded by consumers. The demand curve is
downward sloping, indicating that as the price of a product increases, the quantity demanded
decreases, and as the price of a product decreases, the quantity demanded increases.

The demand curve can be expressed mathematically using the following equation:
Qd = a - bP
Where Qd represents the quantity demanded, P represents the price, a represents the intercept,
and b represents the slope of the demand curve.

It is evident from the table above that a decrease in the price of the commodity leads to an
increase in its quantity demanded. This relationship is reflected in the downward-sloping
demand curve DD, indicating an inverse relationship between the price and quantity
demanded of the commodity.

Graphical Representation of Law of Demand

The law of demand is commonly depicted in graphical form, with the demand curve
representing the relationship between the price and quantity demanded of a good.
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
The demand curve may take on different shapes depending on the type of good, but it
typically has a concave shape. However, it is also possible to represent the demand curve as a
straight line in some economics textbooks.
The demand curve is plotted with the quantity demanded on the x-axis and the price on the y-
axis, reflecting the inverse relationship between the two variables as stated in the law of
demand.
It is important to differentiate between the concepts of demand and quantity demanded.
Quantity demanded refers to the number of goods consumers are willing to buy at a given
price, while demand encompasses all possible relationships between a good's price and
quantity demanded.

Applications of the Law of Demand

The law of demand has important applications in both microeconomics and macroeconomics.
In microeconomics, the law of demand is used to analyze the behavior of individual
consumers and firms in the market. Understanding the law of demand helps firms to set
prices that maximize their profits, and it helps consumers to make purchasing decisions that
maximize their utility.
In macroeconomics, the law of demand is used to analyze the behavior of the overall
economy. Changes in the price of goods and services can have a significant impact on the
economy, and the law of demand helps economists to understand how changes in prices
affect overall demand and economic growth.

Law of Demand Exceptions

While the Law of Demand generally holds true, there are some exceptions to this economic
principle. Some of the exceptions are:

1. Giffen Goods:Giffen goods are inferior goods for which the quantity demanded
increases when the price of the good increases. This is because these goods are
considered essential, and when their price increases, consumers may have to cut back
on purchasing other goods, including higher-quality substitutes, in order to continue
buying the Giffen goods.
2. Veblen Goods: Veblen goods are luxury goods for which the quantity demanded
increases when the price of the goods increases. This is because these goods are
associated with social status and prestige, and as such, consumers may perceive them
as more desirable as their price increases.
3. Essential Goods:For essential goods, such as life-saving medicines, consumers may
be willing to pay a higher price regardless of the quantity demanded, as their demand
for the good is not impacted by changes in price.
4. Market Saturation: When a market becomes saturated with a particular product, the
Law of Demand may not hold, as the demand for the product may decrease despite a
decrease in price.
5. Expectations:Consumer expectations about future prices or economic conditions can
also impact the Law of Demand, as consumers may be willing to buy more of a
product now in anticipation of future price increases, or may reduce their demand for a
product now in anticipation of future price decreases.

Importance of Law of Demand

 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
The Law of Demand is an important economic principle because it helps explain how
consumers respond to changes in the price of goods and services. Here are some of the key
reasons why the Law of Demand is important:

1. Pricing Strategy: Understanding the Law of Demand is essential for businesses to

develop effective pricing strategies. By analyzing the demand curve, businesses can
determine the optimal price point for a product or service that will maximize revenue.
2. Market Analysis: The Law of Demand is also useful for conducting market analysis.
By examining changes in the quantity demanded of a good in response to changes in
its price, analysts can gain insights into consumer preferences, market trends, and the
overall health of the economy.
3. Consumer Behavior: The Law of Demand provides insights into consumer behavior
and how it relates to purchasing decisions. By understanding how consumers respond
to changes in prices, businesses can better understand their customers' needs and
preferences.
4. Public Policy:The Law of Demand is a critical concept for public policy makers,
particularly when it comes to setting taxes or regulations. Understanding how changes
in price will impact consumer behavior is crucial for designing effective policies that
achieve their intended outcomes.

Facts About Law of Demand

The Law of Demand is a fundamental concept in economics that explains the relationship
between the price and quantity demanded of a commodity. Here are some important facts
about the Law of Demand:

1. One-Side:The Law of Demand is one-sided because it only describes the effect of a

change in price on the quantity demanded of a commodity and not the effect of a
change in the quantity demanded on the price of the commodity. This means that the
law only considers the impact of changes in price on demand and not vice versa.
2. Inverse Relationship:The Law of Demand establishes an inverse relationship
between the price and quantity demanded of a commodity. This means that as the
price of a commodity increase, the quantity demanded decreases, and as the price
decreases, the quantity demanded increases.
3. Qualitative, not Quantitative: The Law of Demand provides only a qualitative
statement and does not provide any quantitative information. In other words, it
indicates only the direction of change in the quantity demanded and not the magnitude
of change. This means that the law only explains the overall trend of the relationship
between price and demand, but not the exact amount by which demand will change in
response to a given change in price.
4. No Proportional Relationship: The Law of Demand does not imply any proportional
relationship between the change in the price of a commodity and the change in its
demand. This means that if the price of a commodity falls by 10%, the rise in demand
can be 20%, 30%, or any other proportion, depending on various factors such as
consumer preferences, income levels, availability of substitutes, and so on. Therefore,
the relationship between price and demand is not fixed, and the magnitude of change
in demand cannot be predicted precisely.

Law of Supply Meaning

 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
The law of supply in economics suggests that with other factors remaining constant, if
the price of a commodity increases, its market supply also goes up and vice-versa. It
is one of the fundamental laws in economics. It establishes a direct relationship
between the price and supply of a commodity.
Therefore, if there is a rise in the price, the supply also increases, giving sellers a
chance to make more money.

Therefore, if there is a rise in the price, the supply also increases, giving sellers a
chance to make more money.

Key Takeaways

 The law of supply is a theory in economics that indicates a direct relationship between price
and supply. It suggests that all factors remaining constant, if the price of a commodity
increases, it leads to an increase in its market supply and vice-versa. This is because sellers
will try to gain maximum profit by increasing sales.
 As opposed to this, the law of demand suggests that the with all things remaining constant,
when the price of a commodity increases, it leads to a fall in demand and vice-versa. The
reason behind being consumers tend to spend more on normal goods if their price falls down
due to greater affordability.
 Supply and demand determine the prices of various goods. The supply law also has an
important significance in determining the number of firms operating in a domain. If the price
falls too low, many companies stop production.

How Does the Law of Supply Work in Economics?

It is important to note that we are talking about a theoretical idea. In the real world, many
other factors also play a huge role in determining demand-supply. For example, when a
government levies taxes on certain factors of production, the per-unit cost goes up.
In such a case, the supply will go down to accommodate for the increased costs. As such, the
law remains valid only as long as other factors affecting the market inventory of goods and
services remain constant.
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
Law of Supply Graph

The law of supply graph is upward sloping, reflecting the direct relationship between price
and supply. Let us look at the example below to gain more clarity on this.

Many factors affect the supply in reality, which will lead to a shift in the supply curve. A
decrease in supply shifts the curve to the left and vice-versa. For example, when the cost of
factors of production decreases, it leads to greater production at the same cost. Resultantly,
the supply curve shifts to the right, increasing supply.
However, the changes in the quantity supplied are different from the changes in the supply.
This is because the sellers consider factors such as the market price, profit opportunities,
consumer demand, etc., before determining the quantity supplied.
When there is a change in the quantity supplied, it causes movements along the supply curve.
When the price changes, the supply increases or decreases accordingly, leading to upward or
downward movement along the supply curve.

Law of Supply Example

Let us suppose Tom opens a small eatery offering sandwiches, hotdogs, hamburgers, fries,
and shakes. After a month of operation, Tom receives a good response.

Every day Tom sells –

1. 50 shakes
2. 45 sandwiches
3. 60 hamburgers
4. 30 fries
5. 120 hotdogs

By word-of-mouth, Tom earns a reputation for serving the best hotdogs, drawing in people
from around the city. Responding to the increase in demand, Tom hikes the prices by $1.
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
Tom also increases the supply by making more hotdogs. Reflecting on the example, why do
you think Tom increased the cost?

Tom was already doing well; hiking the price was a risk. But Tom did it anyway, to earn
more profit and maximize his gains. Therefore, this law throws light on a seller’s desire to
maximize profit and sales in the market.

Law of Supply vs Law of Demand

 The law of demand and supply together fix the market price of a commodity. The law of
demand states that when the price of a commodity increases, its demand falls and vice-
versa. Graphically, it is a downward sloping curve indicating the same.
 The law of supply states that when price of a commodity increases, the supply also increases.
It is an upward sloping curve.
 The point where these two curves intersect on the graph becomes the equilibrium or the
market price of the commodity. In other words, it is the price at which people are willing to
buy and the sellers are comfortable to sell the commodity. In the graph above,
the equilibrium price is $15.
 The equilibrium takes into account several factors affecting demand and supply. A simple
example is sellers lowering price to be able to sell more when there are more sellers in the
market, leading to increased supplies. For example, Amazon had lowered the price of Kindle
from $259 to $189 in 2010. The sales rose to three times in the first quarter of 2010, as
compared to 2009.
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )

Deflation & Recession

What is 'Deflation'?

Definition: When the overall price level decreases so that inflation rate becomes negative, it
is called deflation. It is the opposite of the often-encountered inflation.

Description: A reduction in money supply or credit availability is the reason for deflation in
most cases. Reduced investment spending by government or individuals may also lead to this
situation. Deflation leads to a problem of increased unemployment due to slack in demand.

Central banks aim to keep the overall price level stable by avoiding situations of severe
deflation/inflation. They may infuse a higher money supply into the economy to counter-
balance the deflationary impact. In most cases, a depression occurs when the supply of goods
is more than that of money.

Deflation is different from disinflation as the latter implies decrease in the level of inflation
whereas on the other hand deflation implies negative inflation.

Deflation is a long-term decline in asset and consumer prices. A sustained decline in demand
is what is actually responsible for the widespread deflation. Deflation is also called negative
inflation. When the cost of goods and services rises, it is considered inflation, whereas when
they fall, it is considered deflation.

What Causes Deflation?

Deflation can occur due to a lot of reasons. A few important reasons are:
Decreased Consumer Demand

When the demand for a product falls, it happens either due to high prices or insufficient
product supply. This leads a business to take decisions like decreasing the prices or reducing
the number of employees. A vicious cycle is caused by deflation. Whenever a business
decides to cut down jobs, it causes a further fall in demand leading to more job cuts. With the
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
fall in employment, there is a decline in business demand. Businesses have no option but to
reduce prices.

Fall in Production Cost

The production cost goes down whenever the cost of key production input. For example, if
cotton prices have decreased, the production cost of garments will eventually fall. Under such
a scenario, producers might increase production, causing an oversupply of the products. But
if the demand remains unchanged, businesses will need to cut their prices to keep consumers
buying their products.

Supply of Money

If the central bank decides to put strong interest rates in their monetary policies, the people
intend to save their money instead of spending it. This causes a reduction in cash circulation
in the country. In another scenario, deflation can reach significant levels when the money
supply does not rise at the same rate as economic output.

Fierce Competition in the Market

Deflation is caused when there is fierce competition in the market among competitors, which
causes aggressive competition in the market. This usually leads them to cut down their prices
to attract more and more customers to make a place in the market.

What is Recession?
A general decline in economic activity, a contraction in the business cycle is known as
recession. This decline in economic activity is spread over a few months, and there will be
decline in industrial productivity, real income, real GDP, employment, etc
 Economics of IT Industries Prof. Ankita Bawane
MBA ( Finance & Marketing )
A recession happens when the economy slows down and productivity goes below zero. This
period is characterised by unemployment, high rates of interest and inflation, and a very low
Gross Domestic Product (GDP). In other words, when businesses across sectors don’t earn
enough profits, it directly affects the economy as people lose their jobs, which results in them
not spending much money leading to products not being sold, which leads to many
businesses shutting down. While the prices of goods and services are always going up, the
incomes of people are going down.

Recessions are cyclical in nature and tend to occur every five-ten years. However, some
economists believe that recessions should not be seen as a common occurrence and that it
indicates a deeper issue of a flawed societal structure that values profits over anything else.
Most of the time, it takes a few months for a country’s economy to recover from a recession,
but sometimes it can go on for years, in which case it is called an economic depression.

What causes a recession?

There can be many factors that cause an economic recession, and many times it is a
combination of factors that leads to a recession. The causes are mostly external factors such
as war, a pandemic or unrest in some parts of the world, which majorly disrupt the normal
flow of business worldwide. When the COVID-19 pandemic started in 2020, we saw a
recession as the world shut down, affecting many businesses and people throughout the
world.

Sometimes, it doesn’t even have to be a huge event that triggers a recession. If a huge
renowned company abruptly fires a lot of people, this would make other employees feel
nervous and make them spend less on products and save more as a precautionary measure. If
a large part of the population did this of spending less money and saving more, it would lead
to products not being purchased, which would again cause loss for a lot of businesses.