Definition

Economics is the study of scarcity and choice.

Scarcity means that there is a finite amount of a good or service (Basically they are limited).
Because something is limited, we need to make decisions regarding how we use and allocate
our resources.
So studying economics helps use to better make decisions regarding how to deal with the
condition of scarcity.
Also, you should know the difference between scarcity and shortage. Shortage is a short term
condition of a limited amount of a resource. For example, if there is a frost in Florida and the
orange crop is destroyed, the supply of oranges will be limited, but only for that growing
season.

 Meaning of Economics:
The word Economics' originates from the Greek word ‘Oikonomikos’
(a) ‘Oikos’, which means ‘Home’, and
(b) ‘Nomos’, which means ‘Management’.
Thus, Economics means ‘Home Management’

 Economist:
Adam Smith, Known as ‘Father of Economics’
Book name- ‘An Enquiry into the Nature and Causes Wealth of Nation’, 1776.

 Basic Problems of an Economy:

(1) Unlimited human wants,
(2) Limited availability of resources to satisfy those wants, and
(3) Fulfilment of unlimited wants with limited resources.

 Problems come up:

Scarcity of resources: ‘want is a desire to acquire something with the willingness to put in
an effort to acquire it.’

 Opportunity Cost
One of the most important aspects of choice in Economics is the idea that every choice has
trade-off what didn’t you choose. This is related to the concept of opportunity cost.
Opportunity Cost is your second choice-what you give up when you make a decision. For
example, if you choose to go to college, you give up the salary you could have earned if you
go directly into the work force. The salary you would give-up is the opportunity cost of going
to college.
Another example, you spend time and money going to a movie, you cannot spend that time at
home reading a book, and you cannot spend the money on something else. If your next-best
alternative to seeing the movie is reading the book, then the opportunity cost of seeing the
movie is the money spent plus the pleasure you forgo by not reading the book
Remember that Economics is the study of scarcity and choice. The concept of opportunity
cost is an important element in economic choices.

 Basic Economic Problem:

Societies need to determine how to put all of the factors of production together to best deal
with the issue of scarcity. To do this they need to address these Basic Economic Questions:
1. What to Produce
What does a society do when the resources are limited? It decides which goods/service it
wants to produce. Further, it also determines the quantity required. For example, should we
produce more guns or more butter? Do we opt for capital goods like machines, equipment,
etc. or consumer goods like cell phones, etc.? While it sounds elementary, society must
decide the type and quantity of every single good/service to be produced.
2. How to Produce
The production of a good is possible by various methods. For example, you can produce
cotton cloth using handlooms, power looms or automatic looms. While handlooms require
more labour, automatic looms need higher power and capital investment.
Hence, society must choose between the techniques to produce the commodity. Similarly, for
all goods and/or services, similar decisions are necessary. Further, the choice depends on the
availability of different factors of production and their prices. Usually, a society opts for a
technique that optimally utilizes its available resources
3. For whom to Produce
Think about it – can a society satisfy each and every human wants? Certainly not. Therefore,
it has to decide on who gets what share of the total output of goods and services produced. In
other words, society decides on the distribution of the goods and services among the
members of society.
  The Factors of Production
In order to better understand how we make decisions regarding scarcity and choice, it is
important to understand how goods and services are produced. This is where the concept of
the factors of production comes in.
The Factors of Production are classified into four categories:
1. Land or Natural Resources
which are products used in the production of goods and services, come from the earth.
Examples could include lumber or oil. Natural resources can be characterized as either:
Renewable resources are resources that can be replenished, such as trees that can be
replanted. Nonrenewable resources are resources that cannot be replaced such as coal.
2. Labor or Human Resources
is the work that goes into the production of a good or service. When looking at this factor,
we usually look at the number or workers and the workers’ skills.
3. Capital
Capital is the term used for the items that are used to create a good or service. Examples of
this may include the building where a good is produced, or the tools utilized to create a good
or provide a service.
4. Entrepreneurship
Entrepreneurship is the putting together of land labor and capital to create a good or provide a
service. This is basically the ideas that go into the process of creating a good or providing a
service.

 Division of Economics

A. Micro Economics- the behavior of individual economic agents in the markets for
different goods and services and try to figure out how prices and quantities of goods
 and services are determined through the interaction of individuals in these markets.
Examples- demand, supply, factor pricing.

B. Macro Economics- an understanding of the economy as a whole by focusing our

attention on aggregate measures such as total output, employment and aggregate price
level.

 Difference between Economics and Economy

� Economics-Economics is the science and art of decision making, regarding the use of
scarce resources, under the conditions of scarcity, to attain maximum satisfaction.
� Economy- When a country or a geographical region is defined in the context of its
economic activities, it is known as economy or economic system.
  Economic System

1. Market Economy/ Capitalism- It is the economic system where all sorts of economic
problems are automatically solved through market mechanisms of supply and demand.
Capitalism or capitalist economy is referred to as the economic system where the factors of
production such as capital goods, labour, natural resources, and entrepreneurship are
controlled and regulated by private businesses.
� Features-
� Private property
� Freedom of enterprise
� Profit motive
� Price mechanism

2. Socialist Economy-If all the economic problems are corrected through economic
planning undertaken by the government, then that economic system is called centrally
planned economy or Socialist Economy .
� Features-
� Working class assumes the political power
� Restrictions on economic liberty
� Absence of market mechanism
� Absence of right to property

3. Mixed Economy-There is a type of economy which neither capitalistic nor socialistic

in nature but co-exist of both.
� Features-
� Partial restriction on individual liberty.
� Co-existence of private and public sector.
  Sectors of Economy
Tries to maximize return of Economic activities in which its in involved.

1. Primary Sector: In Primary sector of economy, activities are undertaken by directly using
natural resources. Agriculture, Mining, Fishing, Forestry, Dairy etc. are some examples
of this sector.
It is called so because it forms the base for all other products. Since most of the natural
products we get are from agriculture, dairy, forestry, fishing, it is also called Agriculture and
allied sector.
People engaged in primary activities are called red-collar workers due to the outdoor nature
of their work.
2. Secondary Sector: It includes the industries where finished products are made from
natural materials produced in the primary sector. Industrial production, cotton fabric,
sugar cane production etc. activities comes under this sector.
Hence its the part of a country's economy that manufactures goods, rather than producing raw
materials.
Since this sector is associated with different kinds of industries, it is also called industrial
sector.
People engaged in secondary activities are called blue collar workers.
3. Tertiary Sector: This sector’s activities help in the development of the primary and
secondary sectors. By itself, economic activities in tertiary sector do not produce a goods but
they are an aid or a support for the production.
Goods transported by trucks or trains, banking, insurance, finance etc. come under the
sector. It provides the value addition to a product same as secondary sector.
This sector jobs are called white collar jobs.
1. Demand
Demand is the amount of a product that consumers are willing and able to purchase at any
given price. It is assumed that this is effective demand, i.e. it is backed by money and an
ability to buy.
The law of demand states that the higher the price, the lower the quantity demanded; and the
lower the price, the higher the quantity demanded. Naturally, consumers are willing and able
to buy less as the price rises. This results in a downward sloping demand curve.

Determinants of Demand:
The factors that affect demand curve are as follows:
 Price.
 Income
 Teste and Preference
 Change in the price of other goods.
 Population

 Movement along the demand curve

Change in price effect

 Shifts in Demand curve

The demand curve can shift outward (to the right) or inward (to the left). If the demand curve
shifts out, this means that more is demanded at each price level. This increase in demand is
shown by the shift to a new demand curve, D1 in the diagram. An inward shift to a new curve
at D2 indicates a decrease in demand – this indicates that less is demanded at each price level.
Factors that affect shift in the demand curve
 Firstly, an increase in consumers’ incomes is likely to shift a demand curve to the
right for most normal and luxury goods. With more disposable income people buy
more of the things they want. So as incomes increase, the demand for cars, holidays,
consumer electronics etc. also increases. A fall in incomes will cause the demand
curve to shift inwards and to the left – demand decreases.
 A change in tastes and fashion can also shift the demand curve. If goods become
more fashionable the demand curve shifts to the right, increasing demand at all price
levels. If goods go out of fashion, the demand curve shifts to the left.
 Change in the price of other goods:
o Complimentary goods are those used alongside another good. For example, if
demand for holidays increases, demand for luggage or perhaps suntan lotion
will also increase. A change in the price of substitute goods will also shift the
demand curve.
o A substitute is a good used instead of another good. For example, if train
fares increase some people will switch to private transport and travel by car.
This may lead to an increase in the demand for petrol, shifting the demand
curve for petrol to the right. If the price of airline tickets were to increase, then
it is likely that demand for holidays at home in the UK would increase.
 A successful advertising campaign can cause the demand curve for a product to shift
to the right. However, bad publicity will have the opposite effect and cause a shift to
the left.
 Government legislation may also have an impact on the demand for certain products.
When legislation was passed making child seats compulsory in vehicles there was a
significant increase in demand at any given price.
 Technological changes: Better technology and innovations will lead to production of
new goods and services which are more efficient. Hence the demand for new goods
will increase. They will replace old goods and services.
  Number of Buyers and size of the market: The more the buyers in the market ,
larger is the demand; fewer buyers lead to decrease. A large market, spread over a
vast area ensures higher demand.
 Changes in the size of population : When the size of population increases the
demand for various goods and services will go up and vice versa. Growth in
population leads to higher demand for basic commodities like food, clothing and
shelter and over a period of time, for comfort goods like television sets and cars.

 Difference between types of goods

Normal goods-
Law of demand states that if price of product increases demand for this kind of goods
decreases, other things remaining unchanged.
Law of supply states that if price of product increases supply for this kind of goods increases,
other things remaining unchanged.
Substitute goods-
The goods which can be consumed alternatively having similar utility are called substitute
goods. In this case, If price of a product increases, demand for its substitute increases. For
example- Tea and Coffee are considered to be substitute goods of each other in Economics.
Complementary goods-
The goods which are usually consumed together are called complementary goods. For
example, Tea and coffee; Bread and Butter etc.

Exceptions to the law of demand

The law of demand does not apply in every case and situation. The circumstances when the
law of demand becomes ineffective are known as exceptions of the law. Some of these
important exceptions are as under.
 Giffen goods:
Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties of
this category like bajra, cheaper vegetable like potato come under this category. Sir Robert
Giffen of Ireland first observed that people used to spend more their income on inferior goods
like potato and less of their income on meat. But potatoes constitute their staple food. When
the price of potato increased, after purchasing potato they did not have so many surpluses to
buy meat. So the rise in price of potato compelled people to buy more potato and thus raised
the demand for potato. This is against the law of demand. This is also known as Giffen
paradox.
 Conspicuous Consumption – Goods of Snob Appeal:
 This exception to the law of demand is associated with the doctrine propounded by
Thorsten Veblen. A few goods like diamonds etc are purchased by the rich and wealthy
sections of the society. The prices of these goods are so high that they are beyond the reach of
the common man. The higher the price of the diamond the higher the prestige value of it. So
when price of these goods (also called as Veblen goods) falls, the consumers think that the
prestige value of these goods comes down. So quantity demanded of these goods falls with
fall in their price. So the law of demand does not hold good here.
 Change in fashion:
A change in fashion and tastes affects the market for a commodity. When a broad toe shoe
replaces a narrow toe, no amount of reduction in the price of the latter is sufficient to clear
the stocks. Broad toe on the other hand, will have more customers even though its price may
be going up. The law of demand becomes ineffective.
 Emergencies:
Emergencies like war, famine etc. negate the operation of the law of demand. At such
times, households behave in an abnormal way. Households accentuate scarcities and induce
further price rises by making increased purchases even at higher prices during such periods.
During depression, on the other hand, no fall in price is a sufficient inducement for
consumers to demand more.

2. Supply
Supply is the amount of a product which suppliers will offer to the market at a given price.

As the price of an item goes up, suppliers will attempt to maximize their profits by increasing
the quantity offered for sale. This means that the lower the price, the lower the quantity
supplied; and the higher the price, the higher the quantity supplied. At low price levels only
the most efficient suppliers can make a profit so supply is limited. As price increases, the
profit motive attracts new resources to supply and the higher price allows less efficient
producers to make a profit. So as price increases, supply increases.
Explaining the Law of Supply
There are three main reasons why supply curves for most products are drawn as sloping
upwards from left to right giving a positive relationship between the market price and
quantity supplied:
 The profit motive: When the market price rises (for example after an increase in
consumer demand), it becomes more profitable for businesses to increase their output.
Higher prices send signals to firms that they can increase their profits by satisfying
demand in the market.
 Production and costs: When output expands, a firm’s production costs rise, therefore a
higher price is needed to justify the extra output and cover these extra costs of
production.
 New entrants coming into the market: Higher prices may create an incentive for other
businesses to enter the market leading to an increase in supply.

Determinants of Supply:
 Price
 Change in costs
 Weather
 Introduction of New Technology
 Lagislation

 Movements along the supply curve

Change in Price effect

 Shifts in Supply Curve

Like demand, supply can also change – independent of any change in price. Supply at each
price level can increase (shift outwards to S2) or the amount supplied at each price level can
decrease (shift inwards to S1).
Factors that affect supply
 Change in costs: If producers’ costs fall resulting from a factor such as a fall in the
price of raw materials or cost of labour, this will increase supply, shifting the supply
curve outwards and to the right. Now at each price level more is supplied. Rising
costs will have the opposite effect and shift the supply curve inwards and to the left.
 Weather: can have a significant impact on the supply of agricultural products.
Increased output is likely to result from a good harvest – this again shifts the supply
curve outwards and to the right. Bad weather, of course, has the opposite effect.
 Introduction of new technology: especially in production techniques, also increases
supply: this increase in productivity shifts the supply curve outwards and to the right.
 Legislation: can also have a significant impact on the supply of some products.
Increasingly businesses find their costs are increasing because they have to comply
with new anti-pollution legislation introduced by the government. This shifts the
supply curve inwards and to the left. When the government imposes a tax on a good
or service, this too will cause the supply curve to shift to the left.
Exceptions to the law of supply
There are situations when the law of supply – that as price increases supply also crease- does
not hold.
 Backward bending labour supply curve:
The rise in the price of a good or service sometimes leads to a fall in its supply. The best
example is the supply of labor. A higher wage rate enables the worker to maintain his
existing material standard of living with less work, and he may prefer extra leisure to more
wages. The supply curve in such a situation will be ‘backward sloping’ SS 1 as illustrated in
figure.
Equilibrium in demand and supply:
The dictionary definition of 'equilibrium' is 'a state of physical balance', or put more simply,
'a state of rest'.
In microeconomics, supply and demand is an economic model of price determination in
a market.
It concludes that in a competitive market, the unit price for a particular good will vary until it
settles at a point where the quantity demanded by consumers (at current price) will equal the
quantity supplied by producers (at current price), resulting in an economic equilibrium for
price and quantity.

 In the diagram, the supply curve S and the demand curve D intersect at point E.
 Point E is thus the point at which both, the demand for the good and the supply of it
‘clears’.
 Point E corresponds a particular price (OP) and a particular quantity (OQ) at which
D=S
 Thus, ‘Equilibrium’ is defined to be the price-quantity pair where the quantity
demanded is equal to the quantity supplied, represented by the intersection of the
demand and supply curve.

Disequilibrium points..
  Equilibrium point E (where D=S), equilibrium price is P* and quantity, Q*.
 At any point other than point E where the curves intersect, there is a disequilibrium –
either surplus of supply in relation to demand or vice versa.
 When there is excess supply of a good in relation to demand, price will tend to fall
(from P1 to Pe)
 Converse when there is excess demand of a good in relation to its supply, price will
tend to rise (from P2 to Pe)
 The four basic laws of supply and demand are (A recap):
 If demand increases (demand curve shifts to the right) and supply remains unchanged,
a shortage occurs, leading to a higher equilibrium price.
 If demand decreases (demand curve shifts to the left) supply remains unchanged, a
surplus occurs, leading to a lower equilibrium price.
 If demand remains unchanged and supply increases (supply curve shifts to the right),
a surplus occurs, leading to a lower equilibrium price.
 If demand remains unchanged and supply decreases (supply curve shifts to the left), a
shortage occurs, leading to a higher equilibrium price.
3. Common Types of Market Structures
A market structure is an economic environment where a business operates. The market
structure can describe how competitive the industry is by considering factors like how
challenging it is to enter the industry and how many sellers participate. It also considers
relationships between companies and customers to show how prices fluctuate.
Features of market structures
 Some of the features that go into market structure consideration include:
 Seller entry barriers, or how hard it is for a new company to emerge within the market
 Seller exit barriers, or how hard it is for a new company to leave the market
 The degree to which company products are homogeneous or differentiated
 Number of companies in the market
 Number of customers who participate in the market
 Product prices
4 types of market structures
Here are the four main types of market structures:

A. Perfect Competition: Perfect competition is a unique form of the marketplace that allows
multiple companies to sell the same product or service. Many consumers are looking to
purchase those products. None of these firms can set a price for the product or service they
are selling without losing business to other competitors. There are no barriers to any firm that
is looking to enter or exit the market. The final output from all sellers is so similar that
consumers cannot differentiate the product or service of one company from its competitors.
o Features of Perfect Competition
The main features of perfect competition are as follows:
1. Many Buyers and Sellers
2. Homogeneity
3. Free Entry and Exit
4. Perfect Knowledge
5. Mobility of Factors of Production
6. Transport Cost
7. Absence of Artificial Restrictions
8. Uniform Price: Price taker.

B. Monopoly: A marketplace in which there is a lone vendor or seller is known as a

monopoly. However, there are certain conditions to be fulfilled for it. A monopolistic
competition market structure requires a lone manufacturer of a particular good.
There cannot be an alternative for this good, and for this situation to continue over time,
adequate constraints are maintained to stop any other enterprise from entering the
marketplace and start selling the good.
o Features of Monopoly Market
1. Maximise profit: It is an important reason why a company wants to be in a monopoly
market. The company strives to generate and secure not only the revenue but also to
maximise the profit.
2. Price maker: The monopoly players have the authority to fix and plan the price of goods.
In this market, the firm has the sole right to influence the market rate and has the pricing
power. Here, the price is modified according to the demand and supply of goods in the
market.
3. High competition: A monopoly market has high barriers for new players or participants to
enter. Sometimes, high competition makes it difficult for participants of the monopoly market
to make less profits.
4. No Free entry or exit.

C. Oligopoly: An oligopolistic market structure contains a few large sellers that sell to many
consumers. It's challenging to enter the industry because of factors like high startup costs and
patents, but an oligopoly is easier to enter than a monopoly.
Features of Monopoly Market
1. Interdependence: The foremost characteristic of oligopoly is interdependence of the
various firms in the decision making.
2. Advertising.
3.Competition.
4. Barriers to Entry of Firms.
5. Lack of Uniformity.
6. Existence of Price Rigidity.

D. Monopolistic Competitive: A monopolistic competition market structure features many

sellers, meaning that it's easy to enter the industry. Combining aspects of a monopoly and
competitive market, companies within a monopolistic structure can sell products that are
similar but feature slight differences. This allows them to have a small amount of market
power based on how they differentiate products.
Features of Monopolistic Competitive Market:
 Large Number of Buyers and Sellers.
 Free Entry and Exit of Firms.
 Product Differentiation.
 Selling Costs.
 Lack of Perfect Knowledge.
 Less Mobility.
 More Elastic Demand.