ECONOMICS

1.What is supply?
-Supply refers to the quantity of a good or service that producers are willing
and able to offer for sale at different prices during a particular period. It
represents the relationship between the price of a good and the quantity that
producers are willing to supply at that price.
2. Law of Supply?
-The Law of Supply is an economic principle stating that there is an inverse
relationship between the quantity of a good or service supplied and its price.
This means that when the price of a good or service increases, suppliers are
more willing to produce and offer more of it for sale, leading to an increase in
supply.

3.Supply curve?
-The supply curve is a graphical representation of the relationship between the
price of a good or service and the quantity that producers are willing and able
to supply at each price level, holding all other factors constant
4.Supply Schedule?
-A supply schedule is a table or chart that shows the relationship between the
price of a good or service and the quantity that producers are willing and able
to supply at each price level
5.Factors affecting supply?
-Factors affecting supply in economics include:

1.Production Costs: Changes in the cost of factors of production such as labor,

raw materials, and capital can affect the supply of goods. For instance, an
increase in wages may increase production costs and decrease supply.

2.Technological Advances: Improvements in technology can enhance

productivity, reduce production costs, and increase supply. For example, the
adoption of new machinery can make manufacturing processes more efficient.

3.Prices of Related Goods: The supply of a product may be influenced by the

prices of related goods. For substitutes, an increase in the price of one good
may lead producers to switch production to the substitute, increasing its
supply. For complements, a decrease in the price of one good may boost the
supply of its complementary product.
4.Producer Expectations: Expectations about future market conditions,
including prices, may influence supply. If producers anticipate higher future
prices, they may reduce current supply to sell at a higher price later.

5.Government Policies: Taxation, subsidies, regulations, and trade policies can

affect production costs and hence supply. For instance, subsidies can lower
production costs and increase supply, while taxes can have the opposite effect.

6.Number of Sellers: An increase in the number of firms entering the market

can increase supply, while a decrease can reduce it.
5.Supply shifters?
-

When the price is op, quantity supplied is OQ, due to favourable changes in
other factors than price is increase in quantity supplied and the supply curve
downward shifts to SS, From SS and the quantity supplied increase to OQ1.
Due to unfavourable change in other factors than price then is decrease in
quantity supplied and the supply curve upward shifts to SS2 from ss and the
quantity supplied decrease to OQ2
At price Op consumer buys OQ amount of commodity the total utility derived
by consumer buying OQ UNIT is shown by the area OMBQ for which consumer
pays OPBQ which is equal to OQ * OP. Thus .in Marshallian analysis Total
consumer surplus is equal to OHBQ-OPBQ which is the shaded area PMB
represent ting consumer surplus when consumer buys OQ unit of commodity.

Law of supply can be explained by

(a) Expansion
(b) Contraction
QQ1 – expansion in supply due to rise in price shown by a upward
movement in the supply curve from a to b with other factors remains
constant
QQ2- Contraction in supply due to fall in price shown by a downward
movement on the same supply curve from a to c with other factors
remains constant

6. Consumer surplus?
-Consumer surplus is an economic measurement of consumer benefits
resulting from market competition. A consumer surplus happens when
the price that consumers pay for a product or service is less than the
price they're willing to pay. It's a measure of the additional benefit that
consumers receive because they're paying less for something than what
they were willing to pay.

X -axis = quantity demanded

Y-axis =price
-The consumer is willing to pay OM price which is shown by a straight
line demand curve (MN)
-The curve MN also indicated the utility derived from each successive
unit of commodity
-the market price i.e the price consumer actually pays is OP
- At price Op the consumer buys OQ
-The total utility derived by the consumer from OQ units is shown by the
area OMBQ for which the consumer pays OPBQ(OP*OP)
Thus in Marshallian analysis total consumer surplus ( OMBQ-
OPBQ)=PMB which is shown by the shaded area in above diagram.
Therefore PMB represents consumer surplus when the consumer is
buying OQ units
  Producer surplus-

Producer surplus is a concept in economics that represents the difference between the
price at which producers are willing to sell a product and the price they actually receive.
7.Effects of DD & Ss shifters on equilibrium
In economics, demand (D) and supply (S) shifters refer to factors that can
influence the demand and supply curves, respectively. When these
shifters change, they impact the equilibrium price and quantity in a
market. Here's how:

Demand Shifters:
Demand shifters are factors that affect the demand curve for a product
or service. They include changes in consumer preferences, income,
prices of related goods, population demographics, and expectations
about future prices. When any of these factors change, the entire
demand curve shifts.

Increase in Demand: When demand increases due to factors such as

higher consumer income or increased popularity of the product, the
demand curve shifts to the right. This results in a higher equilibrium
price and quantity.

Decrease in Demand: Conversely, if demand decreases due to factors like

a decline in consumer income or the emergence of substitutes, the
demand curve shifts to the left. This leads to a lower equilibrium price
and quantity.

Supply Shifters:
Supply shifters are factors that affect the supply curve for a product or
service. They include changes in production costs, technology, input
prices, government regulations, and expectations about future prices.
When any of these factors change, the entire supply curve shifts.

Increase in Supply: If there's an increase in supply due to factors like

lower production costs or technological advancements, the supply curve
shifts to the right. This results in a lower equilibrium price and a higher
equilibrium quantity.

Decrease in Supply: Conversely, if supply decreases due to factors such

as higher production costs or government regulations, the supply curve
shifts to the left. This leads to a higher equilibrium price and a lower
equilibrium quantity.

Overall, changes in demand and supply shifters influence the equilibrium

price and quantity in a market. When demand or supply increases, the
equilibrium price and quantity also increase. Conversely, when demand
or supply decreases, the equilibrium price and quantity decrease

Situation 1 – Govt increased subsidies

When the govt increases subsidy supply will increase .The supply curve
shift rightward from ss to ss1. The equilibrium point shift from E to
E1 .The quantity supplied changes from Q to Q2 but quantity demanded
is Q . since there is excess supply price will drop from p to p1.

8.Indiffrence curve analysis?

-An indifference curve is a curve that represents all the combinations of
goods that give the same satisfaction to the consumer. Since all the
combinations give the same amount of satisfaction, the consumer
prefers them equally.
  Properties of indifference curve?
-Indifference curves slope downwards from left to right, indicating
the negative relationship between the quantities of two goods a
consumer is willing to consume
-Indifference curves are typically convex to the origin.
-Indifference curves do not intersect each other
-A higher indifference curve represents a higher level of
satisfaction or utility for the consumer
-Indiffrence curve cannot touch either of the axix
-The slope of curve is negative downward from left to right.
 Budget line -A consumer tries to maximise satisfaction in
other words he tries to reach out a higher IC
 Price of goods to be consumed a consumer income are the
two main constraint obstacles in a consumer advancement
to a higher curve.

9.Indifference curve analysis?

-Indifference curve analysis is a fundamental concept in microeconomics used
to represent consumer preferences.
Indifference Curves: An indifference curve is a graphical representation
showing various combinations of two goods that provide equal satisfaction or
utility to a consumer. Each point on an indifference curve represents a
combination of goods among which the consumer is indifferent. In other
words, the consumer is equally happy or satisfied at any point on the curve.

Properties of Indifference Curves:

Downward Sloping: Indifference curves typically slope downward from left to

right. This implies that as the quantity of one good increases, the quantity of
the other good must decrease to keep the consumer equally satisfied.
Convex to the Origin: Indifference curves are typically convex to the origin. This
reflects the principle of diminishing marginal rate of substitution (MRS). As a
consumer has more of one good, they are willing to give up fewer units of the
other good to maintain the same level of satisfaction.
Marginal Rate of Substitution (MRS): The MRS measures the rate at which a
consumer is willing to trade one good for another while maintaining the same
level of satisfaction. It is calculated as the slope of the indifference curve at a
particular point. Mathematically, MRS = ΔY/ΔX, where ΔY represents the
change in the quantity of one good and ΔX represents the change in the
quantity of the other good.

Budget Constraint: In addition to indifference curves, the consumer's budget

constraint is represented graphically as a straight line showing all the
combinations of goods that the consumer can afford given their income and
the prices of the goods. The budget constraint is typically represented as a line
in a two-dimensional graph, with one good on each axis.

Consumer Equilibrium: Consumer equilibrium occurs when the consumer

chooses the combination of goods that maximizes their utility, subject to their
budget constraint. This occurs where the highest possible indifference curve is
tangent to the budget constraint. At this point, the slope of the indifference
curve (MRS) equals the slope of the budget constraint (price ratio).

Indifference curve analysis is a powerful tool in understanding consumer

behavior, preferences, and demand patterns. It forms the basis for many
theories and models in microeconomics, such as consumer choice theory and
the theory of demand
10.Production analysis -Production analysis in economics involves the study of
how firms make decisions regarding the combination of inputs (such as labor,
capital, and raw materials) to produce goods and services efficiently.
Production Function:

The production function represents the relationship between inputs and

outputs in the production process. It shows the maximum quantity of output
that a firm can produce given various combinations of inputs.
-short-Run vs. Long-Run Production:
In the short run, at least one input is fixed (usually capital), while in the long
run, all inputs are variable. This difference has implications for production
decisions and cost analysis.
Short-run production analysis focuses on how firms adjust variable inputs to
maximize output given fixed inputs.
Long-run production analysis examines how firms can change all inputs to
achieve the most efficient production level.
-Marginal Product of Labor (MPL) and Marginal Product of Capital (MPK):

Marginal product measures the change in output resulting from a one-unit

increase in an input while holding other inputs constant.
MPL is the additional output produced by employing one more unit of labor,
while MPK is the additional output produced by employing one more unit of
capital.
-Cost Analysis:

Production analysis is closely related to cost analysis. By understanding

production relationships, firms can make informed decisions about minimizing
costs while maximizing output.
Costs are classified into fixed costs (costs that do not vary with output) and
variable costs (costs that vary with output).
Total cost (TC) equals the sum of fixed costs (FC) and variable costs (VC).
Average total cost (ATC) equals total cost divided by the quantity of output (ATC
= TC/Q).
Production analysis provides insights into how firms can optimize their
production processes, make efficient use of resources, and maximize profits. It
forms the basis for understanding firm behavior in various market structures
and industries.
11.Law of variable proportion?
-The Law of Variable Proportions, also known as the Law of Diminishing
Marginal Returns, is an economic principle that describes the relationship
between the varying input levels and the resulting output in a production
process. According to this law, when one input factor is increased while
keeping all other inputs constant, there comes a point at which the additional
output (marginal product) produced by the variable input starts to diminish or
decrease.

There are three stages which describe the law of variable proportion. These
three stages Depict the variable conditions and factors Positioning with their
impacts. These three stages of the law of variable proportion are discussed
below.

Stage 1

Under stage 1, the TPP increases at an increasing rate, and the MPP also
increases. Due to the increase in the units of variable factor, MPP increases.
This stage is also called the stage of increasing returns. Generally, in stage one,
the producer does not operate. The marginal product increases in this stage. So
that the producer can employ more units and make the proper utilization of
resources.

Stage 2

Here the TPP increases at a diminishing rate. Though it increases at a

diminishing rate, It stays positive. The MPP decreases due to the increase in the
number of units of variables. This stage is called the stage of diminishing
Returns. The producers most likely prefer to operate on the stage.

Stage 3

Here the TPP starts declining but stays positive, while MPP decreases and
becomes negative. This stage is also called the stage of negative returns.
Producers avoid operating in stage 1 as well as in stage 3. In this stage, there is
a decline in the total product. The marginal product also becomes negative. In
stage 3, the cost is higher, and the revenue decreases. This leads to a reduction
in profits.
12. Market ,meaning of market , Types of market?

-In economics, a market refers to a collection of buyers and sellers who interact
to exchange goods or services at an agreed-upon price.

Types of market:

1.perfect competition -In a perfectly competitive market, there are many

buyers and sellers of a homogeneous product (a product that is identical and
has no close substitutes). No single buyer or seller has a large enough market
share to influence the price of the good or service. Prices are determined by
supply and demand, and all firms are price takers (they must accept the market
price). Examples of perfect competition are rare, but agricultural markets (like
wheat or corn) are often cited as examples.
2.Monopoly: A monopoly is a market structure in which there is only one seller
of a particular good or service. Monopolies can arise due to several factors,
such as government regulation (e.g., public utilities), economies of scale
(where the cost of production per unit decreases as the total output increases),
or ownership of a key resource. Because there are no close substitutes for the
good or service, a monopoly has significant control over the price and quantity
of output.
3.Oligopoly: An oligopoly is a market structure with a small number of sellers
(few enough to influence the price) and a homogeneous or differentiated
product. Oligopolies often compete by advertising, product development, or
price fixing (agreements among firms to set prices). Examples of oligopolies
include the telecommunications industry, the automobile industry, and the
airline industry.
4.Monopolistic Competition: Monopolistic competition is a market structure
with many sellers offering similar but differentiated products. In monopolistic
competition, firms have some control over price because their products are not
perfect substitutes for each other. However, they are limited by the ability of
other firms to produce similar products. Examples of monopolistic competition
include restaurants, clothing stores, and hair salons.
 Revenue-In economics, revenue refers to the total amount of money a
firm earns from selling its goods or services over a specific period of time
The main types of revenue include:
 1.Total Revenue (TR): Total revenue is the overall income generated by a
firm from selling its products or services. It is calculated by multiplying
the quantity of goods or services sold by the price at which they are sold.
Mathematically, Total Revenue (TR) = Price (P) × Quantity Sold (Q).

2.Average Revenue (AR): Average revenue is the revenue earned per unit
of output sold. It is calculated by dividing total revenue by the quantity
of output sold. Mathematically, Average Revenue (AR) = Total Revenue
(TR) / Quantity Sold (Q).

3.Marginal Revenue (MR): Marginal revenue is the additional revenue

generated from selling one more unit of output. It is calculated as the
change in total revenue resulting from a one-unit change in quantity
sold. Mathematically, Marginal Revenue (MR) = ΔTotal Revenue /
ΔQuantity Sold.

 COST-cost refers to the expenses incurred by a firm in the process of

producing goods or services. Costs represent the value of resources, such
as labor, materials, and capital, used in production.
 Cost of production -The cost of production refers to the total expenses
incurred by a firm in the process of manufacturing a product or providing
a service. It includes all the costs associated with producing goods or
services, such as raw materials, labor, overhead expenses, and any other
expenses directly related to production.

1.Fixed Costs (FC): Fixed costs are expenses that do not vary with the
level of output produced in the short run. These costs must be paid
regardless of whether the firm produces any output. Examples include
rent for a factory, insurance premiums, and salaries of permanent staff.

2.Variable Costs (VC): Variable costs are expenses that change with the
level of output produced. As production increases, variable costs
increase, and as production decreases, variable costs decrease. Examples
include raw materials, labor costs for temporary workers, and electricity
for operating machinery.
3.Total Costs (TC): Total costs are the sum of fixed costs and variable costs
incurred by a firm. Mathematically, Total Costs (TC) = Fixed Costs (FC) +
Variable Costs (VC).

1. Total cost (TC) refers to the aggregate expenses incurred by a firm in

producing a specific quantity of output within a given period
TC=TVC+TFC
Components of total cost
Fixed Costs (FC): Fixed costs are expenses that do not vary with the
level of output in the short run. These costs remain constant
regardless of the quantity produced. Examples include rent, salaries
of permanent staff, insurance premiums, and depreciation of fixed
assets.

Variable Costs (VC): Variable costs are expenses that change in

proportion to the level of output. They increase as production
increases and decrease as production decreases. Examples include
raw materials, direct labor, and utilities.

Total Fixed Costs (TFC): The sum of all fixed costs incurred by the firm,
regardless of the level of output.

Total Variable Costs (TVC): The sum of all variable costs incurred by
the firm, which vary with the level of output.

Calculation of Total Cost:

Total cost is calculated by adding total fixed costs and total variable
costs:
TC=TFC+TVC

-The total cost is rising upward from left to right

-TC curve is derived by adding up vertically the TVC+TFC curve
-thus Tc & Tvc are parallel to each other since distance between the
two is constant.
 Total fixed cost-Total fixed cost (TFC) refers to the total amount
of expenses a business incurs that do not change with the level
of production output. These costs are there regardless of
whether the business produces one unit, a hundred units, or
even zero units.
TFC=TC-TVC

Eg-Salaries of employee
Insurance premium
 Total variable cost-Total variable cost represents the cost of
production that varies with the level of output produced. As
the firm produces more goods or services, variable costs
increase, and vice versa. Variable costs typically include
expenses such as raw materials, direct labor wages, utilities,
and shipping costs. TVC varies directly with the level of
production
TVC=TC-TFC

-TVC curves slopes upward from left to right

-when output is zero tvc is also zero
-hence tvc curve starts from origin
 Average cost curve(average fixed cost)-Afc is fixed cost per unit
output
AFC= TFC/Q
-Afc and output have inverse relationship
-afc is higher at smaller level of output in given point
-afc curve has negative slope
-the curve slope downward the length
-As output increase afc diminishes
  Average variable cost-The Avc is variable cost per unit output
AVC=TVC/TQ
Avc will come down in the beginning then rise as more units of
output are produced in a given plant
This happens because as we did add more units of variable
factors in a fixed plant the efficiency of the input first increase
then decrease
 The Avc is U-shaped curve which has 3 phases.
1.Decreasing phase (from point A to 3) is the first phare. Ave
declines as may output expands. Ave declines because when we
add mane quantities of variable factors to a given quantity of fired
factors, output increases more efficiently & more than
proportionately due to the operation of increasing returns

2.Constant phase is the and phase ive. at 'B' Ave reaches its
minimum point. When the proportion of both fixed e variable
factors are the most ideal. So, the output will be optimum. Once
the firm operates at its normal full capacity, output reaches its
maximum e as such Ave will become minimum.

3.Increasing phase is the 3rd phase (from B to C), where Ave rises
when once the normal capacity is crossed, Ave rises sharply. This is
because additional units of variable factors will not result in more than
proportionate output Hence, greater output may be obtained but at
much greater Ave. The old proverb - Too many cooks spoils the broth"
applies in this stage. So, it is clean that as long as increasing returns
operates, Avc falls & when diminishing & returns sets in avc tends to
increase.

 Average Total cost(ATC) or Average Cost (Ac)

- Ac refers to cost per unit output
- Ac is sum of afc and avc
- ATC=AFc+avc
In short run Ac curve tends to u shape
-due to combined influence of afc and avc curve which will
shape the ac curve
 Marginal cost-Marginal Cost (MC) is the additional cost
incurred by producing one more unit of output. It measures the
change in total cost resulting from a one-unit change in
production quantity
MC=ΔTC/ΔQ
 Relationship between Mc and AC?
-
The relationship between Marginal Cost (MC) and Average Cost
(AC), also known as Average Total Cost (ATC), is crucial in
understanding the cost structure of a firm and its implications
for production decisions. Here's how MC and AC are related:

MC Below AC: When the Marginal Cost (MC) is below the

Average Cost (AC), the Average Cost decreases. This situation
occurs when the Marginal Cost of producing an additional unit
is less than the Average Cost of all units produced so far. In this
case, adding more units to production reduces the average cost
per unit, leading to a downward slope of the Average Cost
curve.

MC Equals AC: When the Marginal Cost (MC) equals the

Average Cost (AC), the Average Cost is at its minimum point.
This condition represents the lowest possible average cost of
production. At this point, the Average Cost curve reaches its
minimum value, indicating the most efficient level of
production.

MC Above AC: When the Marginal Cost (MC) exceeds the

Average Cost (AC), the Average Cost increases. This situation
occurs when the Marginal Cost of producing an additional unit
is greater than the Average Cost of all units produced so far. In
this case, adding more units to production increases the
average cost per unit, leading to an upward slope of the
Average Cost curve.

Graphically, the relationship between MC and AC can be

depicted as follows:

When MC is below AC, the AC curve is decreasing.

When MC equals AC, the AC curve reaches its minimum point.
When MC is above AC, the AC curve is increasing.