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Bba First Semester: Principle of Economics N103
Bba First Semester: Principle of Economics N103
PRINCIPLE OF ECONOMICS
N103
Characteristics :
# Takes into account only material goods.
# Tried to bring the economic problem which forms the foundation of economics
as a social science.
# The scarcity definition of economics is most universal in nature.
# Has taken both sciences in account i.e. Social and Human.
# It takes into account all human activities.
# Consideration of neutral science was considered much logical.
#His definition does not focus on many important economic issues of cyclical
instability, unemployment, income determination and economic growth and
development.
# Does not take into account the possibility of increase in resources over time.
# Has treated economics as a science only. But in fact it is both a science and an
art.
# The definition is not merely concerned with the allocation of given resources but
also with the expansion of resources, tries to analyze how the expansion and
growth of resources to be used to cope with increasing human wants.
# More dynamic approach.
# According to him problem of resource allocation is a universal problem whether
it is a better economy or an exchange economy.
#Definition is comprehensive in nature as it is both growth oriented as well as
future oriented.
• Economics is science in its methodology and an art in its application, because it has theoretical as well as practical aspects
What is Science?
• Science is a systematized body of knowledge ascertainable by observation and experiment. It is a body of generalizations, principles,
theories or laws which traces out a casual relationship between causes and results.
Kinds of Science:
• There are two kinds of science:
• Positive Science
• Normative Science or Prescriptive Science
Positive science only explains "what is" and normative science tells us "what ought to be"-i.e., positive science describes while normative
science evaluates. Thus, in positive science we derive propositions, theories and laws following certain rules of logic, which explain the
cause and effect relationship between economic variables. While normative science is concerned with describing what should be the
things.
Positive microeconomics is concerned with explaining the determination of relative prices and allocation of resources between different
commodities. Whereas, positive macroeconomics is concerned with how the level of national income and employment, aggregate
consumption and investment, and general price levels are determined.
Normative economics is concerned with what price for a product should be fixed, what wage rate should be paid, how income should
be distributed, etc.
Economics is a positive science because:
• Firstly, economists collect the facts.
• Secondly, they analyze them and derive result.
• Thirdly, they determine the relationship between facts and results.
• Finally, they give a title to the bosomed relationship.
Economics is normative science because:
• Firstly, economists points out different economic problems.
• Secondly, they analyze them in the light of statistics or facts and figures.
• Finally, they advise policies, laws, theories to solve the problems.
Economics is an art because:
• Economists suggest policies along with their implementation procedures to solve the economic problem.Thus,
economics is a science as well as an art.
1. When TU is max. MU 2 14 6
became zero 3 18 4
2. When TU increases 4 20 2
MU remains positive. 5 20 0
3. When TU starts to 6 18 -2
decline Mu becomes
negative.
M.U.
Cont….
Desire to acquire it
Cont….
Px = Price of item x
Py = Price of substitutes
Pz = Price of complements
B = Income of consumer
E = Price expectation of the user
T = Taste or preference of user
U = All other factors
Cont….
2.0 1.0
1.5 2.0
1.0 3.0
0.5 4.5
Demand Curve
Cont….
Cont….
P3
P1
Price
P2
D
c extension
Q
D1 D2
Quantity
Cont….
P2
Price of Tea
P1
D
D1
Q
Q2 Q1
P D
P2
Price of Butter
P1
D D
D1
Q
Q2 Q1
Cont….
Amount demanded of butter per day
COMPLEMENTARY GOODS CASE
DR. SALABH MEHROTRA BBAIst semester 27
Types of Demand
For a purposeful demand analysis for managerial decisions, it is necessary to classify the
large number of goods and services available in every economy. Policy decisions are also
facilitated by an understanding of demand at various levels of aggregation. A classification
in these respects is as follows:
a. Consumer good (goods& service used for final consumption for human& other living
being )and producer goods( used for production of other goods plant, machine, raw
material etc.)
Cont….
(c)
DR. SALABH MEHROTRA BBAIst semester 33
Ed<1 Ed>1
• fig d • fig e
10 10
50 150
50 70
iv. Substitutes
v. Time
%change
= in
quantity
demanded o f good X
E c
%change inprice ofgood Y
Cont….
To business firms
In international trade
In fiscal policy
Cont….
Production Management
Labour Pollution O
I
N U
Natural T
P
U Resources, Land P
T U
Capital, Equipment Goods & Services T
S
Machines S
CONTROL
1 20 20 –
1 2 50 25 30 increasing
3 90 30 40 returns
4 120 30 30
1 5 140 28 20 Diminishing
6 150 25 10 returns
7 150 21.5 0
8 130 16.25 -20
9 100 11.1 - 30 Negative
1
returns
Cont….
Stage I
Increases at an Increases and reaches Increases (but
increasing rate its maximum slower than MPP)
Stage II
Increases at a Starts diminishing Starts diminishing
diminishing rate and becomes equal to zero
and becomes maximum
Stage III
Reaches its maximum, Keeps on declining continues to
becomes constant and becomes negative diminish but must
and then starts declining always be greater
than zero
Cont….
The technical possibilities of producing an output level by various combinations of the two
factors can be graphically represented in terms of an isoquant (also called iso-product
curve, equal-product curve or production indifference curve).
OR
it is defined as the locus of various combinations of two inputs in the existing state
of technology to produce a given level of output.
OR
It is a curve that shows all possible combinations of inputs that gives same level of
output
Cont….
Isocost line
Cont….
Cont….
Returns to scale
Coordination and control •As a business grows control of activities gets harder
problems •As the firm gets bigger and new parts of the business are set
up it is increasingly likely people will be working in different
ways and this leads to problems with monitoring
Motivation •As businesses grow it is harder to make everyone feel as
though they belong
•Less contact between senior managers and employees so
employees can feel less involved
•Smaller businesses often have a better team environment
which is lost when they grow
In diagram, tangent to TC
(Total Cost) is parallel to
TR (Total Revenue) at OQ
level of output. We observe
that total profit of the firm
is maximum at OQ level of
output as the gap between
TR and TC is maximum
here. At any other level of
output, the profit level will
reduce.
• a perfectly competitive market exists when every participant is a "price taker", and no participant
influences the price of the product it buys or sells. Specific characteristics may include :
• Single seller: In a monopoly there is one seller of the good who produces
all the output.[ Therefore, the whole market is being served by a single firm,
and for practical purposes, the firm is the same as the industry.
• Market power: Market power is the ability to affect the terms and conditions
of exchange so that the price of the product is set by the firm (price is not
imposed by the market as in perfect competition).Although a monopoly's
market power is high it is still limited by the demand side of the market. A
monopoly faces a negatively sloped demand curve not a perfectly inelastic
curve. Consequently, any price increase will result in the loss of some
customers.
• Firm and industry: In a monopoly, market, a firm is itself an industry.
Therefore, there is no distinction between a firm and an industry in such a
market.
• Price Discrimination: A monopolist can change the price and quality of the
product. He sells more quantities charging less price against the product in
a highly elastic market and sells less quantities charging high price in a less
elastic market. BBA DR SALABH MEHROTRA (MANAGERIAL
90
ECONOMICS)
Market Structure comparison
Profit
Elasticity Product
Number Market Excess maximizat Pricing
of differentia Efficiency
of firms power profits ion power
demand tion
condition
Perfect
Perfectly
Competitio Infinite None None No Yes P=MR=MC Price taker
elastic
n
Monopolist
Highly Yes/No
ic Price
Many Low elastic High (Short/Lon No[ MR=MC
competitio setter
(long run) g)
n
Absolute
Relatively Price
Monopoly One High (across Yes No MR=MC
inelastic setter
industries)
MR D
Q1 Quantity
BBA DR SALABH MEHROTRA (MANAGERIAL
98 98
ECONOMICS)
• Above the kink, demand is relatively elastic because all other
firms' prices remain unchanged. Below the kink, demand is
relatively inelastic because all other firms will introduce a similar
price cut, eventually leading to a price war. Therefore, the best
option for the oligopolist is to produce at point E which is the
equilibrium point and the kink point.
• Graph explanation: Let P1 and Q1 be the existing price and
quantity for this oligopoly firm: due to the assumptions of this
model, the demand curve has a kink in it at this price and
output. Because of the strange shape of the demand curve, the
MR curve is discontinuous, or has a gap in it