Class Notes-BUS 525.

2-Spring 2024

March 2, 2024

Positive vs. Normative Economics

1. If the price of the mask will be lower, then more people will wear mask.
2. The government should reduce the price of mask to encourage more people to wear mask.

All Economic systems must have some way of answering 3 basic questions:
1. What goods and services (products/commodities) are produced and in what
quantities?
The available options are: T-Shirts, Plane, Masks…..
-the firm’s budget/initial capital
-the economic condition and the numbers of the consumers of the market where they want
to sell the product.
100
2. How are the goods and services produced and who produces them?
Least Cost Technology
You can produce either by
Option 1 (Technology 1)-Using more labour: Labour Intensive Technology (100L+20K)
(80L+40K) (70L+50K)
L=Labour; K=Capital
Option 2 (Technology 2)-Using more capital: Capital Intensive Technology (100K+20L)
W (Wage)=MPL (Marginal Productivity of the Labour); In any market wage is determined
based on the productivity of the workers.
High MPL=High W
Low MPL=Low W
3. Who gets the goods and services that are produced?
-Poor or Rich
1. Post Hoc Fallacy
Two Events
Event A: Agricultural subsidy provided by the Govt.
Event B: Bumper Agricultural Production
Because of the subsidy (A) there is bumper production (B): Because of A, B occurs.
Event C: Favourable Weather
[The post hoc fallacy occurs when we assume that, because one event occurred before another
event, the first event caused the second event
A Post Hoc is a fallacy with the following form
1 A occurs before B
2 Therefore A is the cause of B]

A: SBn teaches well

B: You secure a good grade
A causes B
C: You work hard

2. Failure to hold other things constant

Remember to hold other things constant when you are analysing the impact of a variable on the
economic system.
If prices decreases, then demand will increase. (other things, income remain constant)

Y=100; P=20; Q=5

Y=100; P=10; Q=10
Y=50; P=10; Q=5

3. The fallacy of composition

When you assume that what is true for the part is also true for the whole, you are committing the
fallacy of composition
Say, there are 3 classes at MBA
Class 1: 20L+10 F
Class 2: 25L+5 F
Class 3: 30L+OF

Opportunity Cost
Opportunity cost of any action is the best or next highest ranked alternative foregone
because of choosing the given action

Individuals/Options 1 2 3
A Textbook Pair of Jeans Dinner
B Textbook Dinner Pair of Jeans

Individuals/Options 1 2 3
A Attending Football Movie
Class
B Attending Movie Football
Class

Marginalism
Right Now, we are producing 10 Units.
Should we produce 11 units?
Additional (Marginal) Cost (MC)
Additional (Marginal) Benefit (MB)

The Rule of Thumb is as follows.

As long as, MB>MC=go for further production
As long as, MB<MC=reduce the production
MB=MC; Optimal/efficient point
Right Now, we are producing 10 Units.
Unit Marginal Cost Marginal Benefit
11 20 30
12 30 30
13 50 40

Demand and Supply

Having checked the consistency between our desire to pay and ability to pay, we
can find an inverse relationship between demand and supply of any product.

Demand Schedule
Price Quantity Demanded
100 20
80 40
60 60
40 80
20 100

Let us assume, there are 5 prices where, 100 is considered as a high price and 20 is
assumed to be a low price.
There is a negative/inverse relationship between price and demand (quantity).

Price then quantity

Price then quantity

Law of Demand: When all other things are remaining constant, there is a negative
relationship between the price and quantity demanded. (Law of Demand)
Before discussing the demand concept, demand schedule and the law of demand, it
is recommended that we check the consistency between our desire to pay and
ability to pay.

Demand = F (Own Price, Income, Price of related goods, Tastes, Future Expected
Price/Income……)

Movement Along the Demand Curve: When price decreases, demand increases
(law of demand). This implies movement along the demand curve (MADC) (still
we have the same demand curve; no change in demand curve). When we have the
MADC, we define the demand changes as the changes in the quantity demand (10).
Another important point is that, we can see both the variables, when we have the
MADC.

Shift in the Demand Curve: When any other determinants except price changes,
demand changes. This implies shift in the demand curve (SDC) (now we have
different demand curves). When we have the SDC, we define the demand changes
as the changes in the demand (10).

Substitute Products: We can have any of the two products (Pizza and Burger)
(Tea and Coffee)
100 consumers; when prices of T and C are equal; 50-T; 50-C
Price of C increases by 25%: 80-T; 20-C
Complementary Products: One complements the other product (Tea and Sugar)
(Car and Petrol)
These can be known as the related product.

Demand = F (Own Price, Income, Price of related goods, Tastes, Future Expected
Price/Income……)

Price

Quantity Demanded

If there is any change in price, we have the movement along the demand curve
(we remain on the same demand curve).
If there is any change of any the determinant (other than price), we have a shift in
the demand curve (we will have a new demand curve)

Price (Negative relationship between price and quantity)

Price then quantity

Price then quantity

Income: (Positive relationship between price and quantity)
For a normal product:
Income demand

Income demand

For an inferior product:

If income increases, then demand decreases
Price of related goods:
Substitute: (there is a positive relationship between the price of the substitute
product and demand of the original product)
If price of substitute product increases (Pizza Price increases), then demand for the
another product (Burger) increase
Complementary: (there is a negative relationship between the price of the
complementary product and demand of the original product)
If price of complementary product increases (Sugar Price increases), then demand
for the another product (Tea) decrease
When there is any change in price; we have the movement along the demand
curve; change in the quantity in demand

Determinants of Demand
1. Own Market price (Inverse relationship between price and quantity)-MADC
2. Consumer income
[If income increases (other things remain constant), demand increases
If income decrease, demand should also decrease.
This is true when the product is normal.]
Normal vs. Inferior (low quality product)
When the income of a poor people is 100, he/she consumes 10 kilo dry fish
3. Prices of related goods
Related goods: Substitute (Pizza and Burger) or Complementary (Octane and Car)
When burger and pizza prices are same: 1+3
Burger price becomes double, Pizza demand increases
If octane price increases, car demand will decrease.
4. Tastes
5. Expectations of Future Price and Income
In case of any change in future income or price, what will happen to the present
consumption
If future price increases, present consumption should increase
If future price decreases, present consumption should decrease
If future income increases, present consumption should increase
If future income decreases, present consumption should decrease

6. Number of Consumers

If there is a change in (own) price, then there will be a movement along the
demand curve. It implies that demand curve will not shift; we are moving along the
same demand curve.

Any change of the other determinates (except own price), the demand curve will
shift.
Determinants of Supply
Prices
Input prices (has a negative relation with the supply)
Benchmark Scenario: Selling Price=Tk 10; Input Price=Tk 5; Profit=Tk 5
Case 1: Selling Price=Tk 9; Input Price=Tk 2; Profit=Tk 8; supply will also
increase (If input price decreases, supply will increase)
Case 2: Selling Price=Tk 10; Input Price=Tk 8; Profit=Tk 2; supply will also
decrease (If input price increases, supply will decrease)
Technology
An advanced technology usually lowers the production cost/input price (Advanced
technology will increase the supply due to lower input price)
A traditional technology usually increase the production cost/input price.
(traditional technology will decrease the supply due to higher input price)
Expectations
If expected future price is higher, what will happen to the current supply?
expected future price is higher=Current supply will be lower
expected future price is lower=Current supply will be higher
Number of producers
Price Qty. Demanded Qty. Supplied Market Condition Pressure on the Market Price

(1) (2) (3) (4) (5)

100 20 100 Supply exceeds Downward pressure on the

demand (80)
price level
“Excess Supply”
Or
Surplus
80 40 80 Supply exceeds Downward pressure on the
demand (40)
price level
“Excess Supply”
Or
Surplus
60 60 60 Neither excess Neutral/No pressure on the

demand or supply market price

40 80 40 Demand exceeds Upward pressure on the price

supply (40) level

“Excess demand”

Or

Shortage

20 100 20 Demand exceeds Upward pressure on the price

supply (80) level

“Excess demand”

Or

Shortage

1. What is the effect of on the equilibrium price and quantity of tea if the price of sugar increases.
 Elasticity
Initial Discussion:
If price increases, then quantity demanded decreases (by how much?)
If price decreases, then quantity demanded increases (by how much?)

A 10 % increase in price: what will happen to the quantity demanded? There will
be a reduction in the quantity demanded (by how much?)

If income increases, then quantity demanded increases (by how much?)

If income decreases, then quantity demanded decreases (by how much?)

Elasticity is the measurement of the percentage change in one variable (Y) that
results from a 1% change in another variable (X)
Y=f(X); Y=a+bX
A 1% change in X Variable can cause Y variable to change by 5% (more than
1% change in Y variable)
A 1% change in X Variable can cause Y variable to change by 0.5% (less than 1%
change in Y variable)
A 1% change in X Variable can cause Y variable to change by 1% (exactly 1%
change in Y variable)

Y=f(X); Y=a+bX
Q=f(P); Q=a+bP (Supply-side)
Q=a-bP (Demand-side)

When the price rises by 1% quantity demanded might fall by 5%

The price elasticity of demand is 5 in this example
 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴𝑛𝑜𝑡ℎ𝑒𝑟 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 (𝑄)
Elasticity=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑛𝑒 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 (𝑃)

5 0.5 1
= =5>1; = =0.5<1; = =1
1 1 1

Different Types of Elasticity:

1.Elasticity of Demand
i) Price Elasticity of Demand
ii) Income Elasticity of Demand
iii) Cross Price Elasticity of Demand
2.Elasticity of Supply

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄) 5%

Elasticity (ED)= = =5
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 (𝑃) 1%

A 1% change in P can cause Q variable to change by 5% (more than 1% change

5%
in Q variable)= =5 (is greater than 1)
1%

A 1% change in P Variable can cause Q variable to change by 0.5% (less than 1%

0.5%
change in Q variable) =0.5 (is smaller than 1)
1%

A 1% change in P Variable can cause Q variable to change by 1% (exactly 1%

1%
change in Y variable) =1 (equals to 1)
1%

ED>1(=Elastic Demand)
ED<1(=Inelastic Demand)
ED=1(=Unit Inelastic Demand)
Different Types of Elasticity:
1. Elasticity of Demand
(Higher price will lower the demand (by how much); higher income will increase the demand
for a normal product (by how much); higher price of pizza will increase the demand for
burger (by how much)

Price Elasticity of Demand (please remember, we will use a negative

sign in the formula):
If price (own price) increases, then quantity demanded decreases (by
how much?)
If price decreases, then quantity demanded increases (by how much?)
Income Elasticity of Demand
If income increases, then quantity demanded increases (by how much?)
If income decreases, then quantity demanded decreases (by how much?)
Cross Price Elasticity of Demand
If the price of one commodity Changes, then quantity demanded of
another commodity also changes (by how much?)
2. Elasticity of Supply
(higher price will increase the quantity supplied (by how much))
Price Elasticity of Demand:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒
𝑄2 −𝑄1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑= *100
𝑄1

where
Old quantity: 𝑄1
New quantity: 𝑄2
 𝑃2 −𝑃1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒= *100
𝑃1

Old price: 𝑃1
New price: 𝑃2
𝑄2 −𝑄1
∗100
𝑄1
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝑃2 −𝑃1 ;
𝑃1
∗100

𝑄2 −𝑄1
𝑄1
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝑃2 −𝑃1 ;
𝑃1

𝑄2 −𝑄1 𝑃2 −𝑃1
Elasticity= ÷
𝑄1 𝑃1
𝑄2 −𝑄1 𝑃1
Elasticity= ∗
𝑄1 𝑃2 −𝑃1

𝑄2 −𝑄1 𝑃1 ∆𝑄 𝑃1
Elasticity=( ∗ )= ( ∗ )=
𝑃2 −𝑃1 𝑄1 ∆𝑃 𝑄1
∆𝑄 𝑃
Elasticity=−(∆𝑃 ∗ 𝑄1 )
1

-(-5)
Elasticity is 5

∆𝑄 𝑃1
Elasticity=−( ∗ )
∆𝑃 𝑄1
When the price increases from 10 to 20, the quantity demanded decreases from 100 to 90;
𝑃1 =10
𝑃2 =20
𝑄1=100
𝑄2 =90
𝑄 −𝑄 𝑃 90−100 10
Elasticity=−( 𝑃2 −𝑃1 ∗ 𝑄1 ); =−( 20−10 ∗ 100)
2 1 1
 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒

A 10% increase in Price can lead to 3 possibilities

1. More than 10% decrease in the quantity demanded (10.5%; 11%; 20%; 90%)
2. Less than 10% decrease in the quantity demanded
3. Exactly 10% decrease in the quantity demanded

1. More than 10% decrease in the quantity demanded (10.5%; 11%; 20%; 90%)

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
10%
𝑖𝑠 𝑔𝑟𝑒𝑎𝑡𝑒𝑟 𝑡ℎ𝑎𝑛 10%
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
10%
11%
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 10%; >1

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒕𝒉𝒆 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅>

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒕𝒉𝒆 𝑷𝒓𝒊𝒄𝒆
𝑬𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 > 𝟏

2. Less than 10% decrease in the quantity demanded (9.5%; 5%; 2%; 1.9%)

5%
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
10%
𝑖𝑠 𝑠𝑚𝑎𝑙𝑙𝑒𝑟 𝑡ℎ𝑎𝑛 10%
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
10%
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑< 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 < 1

10%
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 10%;
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 1
To Sum up:
The value of elasticity can take value, which is
>1
<1
=1

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒

0
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
25%

0
=0
𝐴𝑛𝑦 𝑁𝑢𝑚𝑏𝑒𝑟

𝐴𝑛𝑦 𝑁𝑢𝑚𝑏𝑒𝑟
=Undefined/infinity
0

At Savar: Only Colgate

At Mohammadpur: Colgate; Close-up and Pepsodent

Availability of Close Substitutes

Time Horizon
All of a sudden, the price of Colgate increases by 50%

At Savar: Only Colgate=Only one available option; a reduction of 10%

At Mohammadpur: Three Options=; a reduction of 90%

Income Elasticity of Demand:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒

𝑄2 −𝑄1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑= *100
𝑄1

where
Old quantity: 𝑄1
New quantity: 𝑄2
𝐼 −𝐼1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒= 2 *100
𝐼1

Old Income: 𝐼1
New Income: 𝐼2

𝑄2 −𝑄1
𝑄1
∗100
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝐼2 −𝐼1 ; Type equation here.
𝐼1
∗100

𝑄2 −𝑄1 𝐼1
Elasticity=( ∗ )
𝐼2 −𝐼1 𝑄1

When income increases from 50 to 100, the quantity demanded increases from 10 to 30;
Calculate the elasticity
Elasticity should be positive (higher income causes quantity to increase)

When income increases from 50 to 100, the quantity demanded decreases from 60 to 40;
Calculate the elasticity
Elasticity should be negative (higher income causes quantity to decrease)

Positive=I and Q are moving to the same direction=Normal

Negative=I and Q are moving to the opposite direction=Inferior

𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎𝒏𝒐𝒕𝒉𝒆𝒓 𝒄𝒐𝒎𝒎𝒐𝒅𝒊𝒕𝒚 (𝒀)
=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑶𝒏𝒆 𝑪𝒐𝒎𝒎𝒐𝒅𝒊𝒕𝒚 (𝑿)

𝑄 −𝑄 𝑃 𝑋
Elasticity=(𝑃 2𝑌−𝑃 1𝑌 ∗ 𝑄1 )
2𝑋 1𝑋 1𝑌

𝑄2𝑌 −𝑄1𝑌 𝑃1𝑋

Elasticity=( ∗ )
𝑃2𝑋 −𝑃1𝑋 𝑄1𝑌

Positive=PX and QY are moving to the same direction=Substitutes

Negative= PX and QY are moving to the opposite
direction=Complementary
When the price of good A increases from 5 to 8, the quantity demanded of good B
increases from 20 to 25;

𝑄2 −𝑄1 𝑃1
Elasticity=−( ∗ ); Normal Formula
𝑃2 −𝑃1 𝑄1

In case we need to use a midpoint formula:

𝑃1 +𝑃2
𝑄2 −𝑄1 𝑃1 +𝑃2 /2 𝑄2 −𝑄1 2
Elasticity=−( ∗ ) =−( ∗ 𝑄1 +𝑄2 )
𝑃2 −𝑃1 𝑄1 +𝑄2 /2 𝑃2 −𝑃1
2
Income Elasticity of Demand:
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒

𝑄2 −𝑄1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑= *100
𝑄1

where
Old quantity: 𝑄1
New quantity: 𝑄2
𝐼 −𝐼1
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐼𝑛𝑐𝑜𝑚𝑒= 2 *100
𝐼1

Old Income: 𝐼1
New Income: 𝐼2

𝑄2 −𝑄1
∗100
𝑄1
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = 𝐼2 −𝐼1 ; Type equation here.
𝐼1
∗100

𝑄2 −𝑄1 𝐼1
Elasticity=( ∗ )
𝐼2 −𝐼1 𝑄1
When income increases from 50 to 100, the quantity demanded increases from 10 to 30;
Calculate the elasticity
Elasticity should be positive (higher income causes quantity to increase)

When income increases from 50 to 100, the quantity demanded decreases from 60 to 40;
Calculate the elasticity
Elasticity should be negative (higher income causes quantity to decrease)
 Positive=I and Q are moving to the same direction=Normal
Negative=I and Q are moving to the opposite direction=Inferior

𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑎𝒏𝒐𝒕𝒉𝒆𝒓 𝒄𝒐𝒎𝒎𝒐𝒅𝒊𝒕𝒚
=
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑶𝒏𝒆 𝑪𝒐𝒎𝒎𝒐𝒅𝒊𝒕𝒚

𝑄 −𝑄 𝑃 𝑋
Elasticity=(𝑃 2𝑌−𝑃 1𝑌 ∗ 𝑄1 )
2𝑋 1𝑋 1𝑌

𝑄2𝑌 −𝑄1𝑌 𝑃1𝑋

Cross Price Elasticity =( ∗ )
𝑃2𝑋 −𝑃1𝑋 𝑄1𝑌

Positive=PX and QY are moving to the same direction=Substitutes

Negative= PX and QY are moving to the opposite
direction=Complementary
When the price of good A increases from 5 to 8, the quantity demanded of good B
increases from 20 to 25;

𝑄2 −𝑄1 𝑃1
Elasticity=−( ∗ )
𝑃2 −𝑃1 𝑄1

In case we need to use a midpoint formula:

𝑃1 +𝑃2
𝑄2 −𝑄1 𝑃1 +𝑃2 /2 𝑄2 −𝑄1 2
Elasticity=−( ∗ ) =−( ∗ 𝑄1 +𝑄2 )
𝑃2 −𝑃1 𝑄1 +𝑄2 /2 𝑃2 −𝑃1
2

Increase in Total Revenue Decrease in Total Revenue

Increase in Price Inelastic Demand Elastic Demand
Decrease in Price Elastic Demand Inelastic Demand
PPF

Say, we have 100 Labour and 100 Capital (Fixed)

A. We are using the 100 L and 100 K to produce 50000 Computer (100
L +100K) and 0 Television (0 K+0L)
B. Now, we are producing 10000 Television (20L+20K); 40000
Computer (80L+80K)
In order to produce 10K extra TV, we have to sacrifice 10K of
Computer
What is the opportunity Cost: 10000:10000 (1:1)
The opportunity cost of 1 television set is 1computer

Combination Computer TV Sets Opportunity

Costs
A 50000 0 -
B 40000 10000 1
C 30000 20000 1
D 20000 30000 1
E 10000 40000 1
F 0 50000 1

Combination Computer TV Sets Opportunity

Costs
A 50000 0 -
B 40000 20000 1/2
C 30000 40000 1/2
D 20000 60000 1/2
 Combination Computer TV Sets Opportunity
Costs
A 50000 0 -
B 40000 20000 1/2
C 25000 40000 3/4
D 0 60000 5/4

1=10
2=18 (10+8)
3=24 (10+8+6)
4=28 (10+8+6+4)
5=30 (10+8+6+4+2)
6=30 (10+8+6+4+2+0)
7=28 (10+8+6+4+2+0+ (-2))
Utility
Total utility is the total benefit that a person gets from the
consumption of a good or service.

Q Total Utility (TU) Marginal Utility (MU)

0 0 -
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

The more and more we consume, the less and less benefit we
can expect.
TU increases at a decreasing rate
MU decreases with the higher level of consumption (Law of
Diminishing Marginal Utility)

∆𝑇𝑈
MU=
∆𝑄

𝑇𝑈1 −𝑇𝑈0 10−0

𝑀𝑈1 = = =10
𝑄1 −𝑄0 1−0

𝑇𝑈4 −𝑇𝑈3 28−24

𝑀𝑈4 = = =4
𝑄4 −𝑄3 4−3

The MU of an abundant product (water) should be low

The MU of a scarce/limited product (diamond) should be

high

Market price is based on the MU of the commodity

If any commodity is scarce, then the MU of that commodity
should be high as well as the Market Price
Three Relationship between TU and MU:
1. As long as TU increases, MU is always positive (When
Q tends to reach 6)
2. As long as TU decreases, MU is always negative (Q>6)
3. When TU reaches to a maximum level, MU is zero
(Q=6)

Equimarginal principle states that a consumer

having a fixed income and facing fixed market
prices of goods will achieve maximum
satisfaction or utility when the marginal
Utility of the last dollar spent (The ratio of MU
and Price) on each good is exactly the same as
the Marginal Utility of the last dollar spent on
any other good.
If we have only 2 commodities (X and Y and Z),
we can reach the maximum benefit
(equimarginal principle) if the following
condition is met.
 𝑴𝑼𝑿 𝑴𝑼𝒀 𝑴𝑼𝒁
= =
𝑷𝑿 𝑷𝒀 𝑷𝒁

𝑴𝑼𝟏 𝑴𝑼𝟐 𝑴𝑼𝟑 𝑴𝑼𝟒 𝑴𝑼𝟓

= = = =
𝑷𝟏 𝑷𝟐 𝑷𝟑 𝑷𝟒 𝑷𝟓

When the Marginal Utility of the last dollar

𝑴𝑼𝑿
spent for commodity X=
𝑷𝑿

When the Marginal Utility of the last dollar

𝑴𝑼𝒀
spent for commodity Y=
𝑷𝒀

𝑴𝑼𝑿 =100; 𝑴𝑼𝒀 = 𝟏𝟓𝟎

𝑷𝑿 =2 (Fixed); 𝑷𝒀 = 𝟑 (Fixed)
𝑴𝑼𝑿 𝑴𝑼𝒀
=50=
𝑷𝑿 𝑷𝒀

𝑴𝑼𝑿 =200; 𝑴𝑼𝒀 = 𝟏𝟓𝟎

𝑷𝑿 =2 (Fixed); 𝑷𝒀 = 𝟑 (Fixed)
𝑴𝑼𝑿 𝑴𝑼𝒀
>
𝑷𝑿 𝑷𝒀
(200/2)100> (150/3)50
To restore the equilibrium condition through the
changes of X consumption we have to do as
follows.
We need to increase the consumption of
X
MUX will decrease
𝑴𝑼𝑿 𝑴𝑼𝒀
<
𝑷𝑿 𝑷𝒀
𝑴𝑼𝑿 =50; 𝑴𝑼𝒀 = 𝟏𝟓𝟎
𝑷𝑿 =2 (Fixed); 𝑷𝒀 = 𝟑 (Fixed)

THE THEORY OF PRODUCTION

Output=f (Economic Resources/Inputs)
Output=f (Labour, Land, Capital,
Technology…Energy)
1. 5000=f (100L 100K 100 Land Tech-A)
2. 6000=f (100L 100K 100 Land Tech-B)

The production function shows the maximum

amount of output that can be produced with a given
amount of input when the best production
techniques/technbologies available are used.

In other words, the production function specifies the

maximum output that can be produced with a given
quantity of inputs. It is defined for a given state of
emerging and technical knowledge
If the percentage in output is greater than the
percentage in input=Increasing returns to scale
where the value of returns to scale is greater than 1
If the percentage in output is less than the percentage
in input=Decreasing returns to scale where the value
of returns to scale is less than 1
If the percentage in output is equal to the percentage
in input=Constant returns to scale where the value of
returns to scale equal to 1

In the traditional theory of the firm, total costs are split into two groups:
1) Total Fixed Costs (TFC)
2) Total Variable Costs (TVC)
TC = TFC+TVC
The Total Cost represents the lowest total taka needed to produce each level of output. Total cost
rises as quantity rises.
The Total Fixed Cost (TFC) represents the total taka that is paid out even when no output is
produced. Fixed cost is not affected by any variation in output.
Examples: Rental Payment, Interest Payments
To produce 10 output, you need 1 labour (to hire 1 labour you have to pay 1000 taka)
When you plan to produce 100 output, you need 10 labour
The Total Variable Cost (TVC) represents expenses that vary with level of output including raw
materials, wages, and all other costs that are not fixed.
TC=TFC+TVC
𝑻𝑪 𝑻𝑭𝑪 𝑻𝑽𝑪
= +
𝑸 𝑸 𝑸
AC=AFC+AVC
∆𝑻𝑪
MC=
∆𝑸

TVC=TC-TFC
TFC=TC-TVC=60-0=60
When output is zero; there is no variable cost.

Qty. TFC TVC TC AFC AVC AC MC

(TFC+TVC) (TFC/Q) (TVC/Q) 1. (TC/Q) (ΔTC/ΔQ)
2. (AFC+AVC)
0 60 0 60 ∞ ∞ ∞ -

1 60 90 150 60 90 150 90
2 60 110 170 30 55 85 20
3 60 125 185 20 41.6 61.6 15
4 60 150 210 15 37.5 52.5 25
5 60 200 260 12 40 52 50
6 60 300 360 10 50 60 100
7 60 490 550 8.5 70 78.5 190

U
TC = TFC+TVC
TVC=TC-TFC
𝑻𝑭𝑪 𝟔𝟎
AFC= ; AFC at level 0= =∞
𝑸 𝟎
𝑻𝑽𝑪
AVC=
𝑸
𝑻𝑪
AC=
𝑸

AC = AFC+AVC
𝜟𝑻𝑪
MC=
𝜟𝑸