Economics For Entrepreneurs

ECONOMICS FOR
ENTREPRENEURS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
What is an economic system ?
It is a system of government – where the overall economic
policies of the government are synchronised around
certain philosophy :
economic system is based on following ideas :
1. the extent of government intervention / regulation
2. extent of private sector participation and freedom to
private sector
3. level of involvement of private sector and public sector
in the economy
What are the features of
capitalism?
The USA is an ideal model of capitalism : you
can see it has following characteristics :
1. laissez faire – almost complete freedom to
private sector
2. very high inequality between rich and poor –
due to market forces
3. market forces determine production and
condumption – producers produce what
consumers demand
What is consumer sovereignity ?
Consumer is the king

in capitalism consumer is the king – here
producers have to produce what consumers
demand and they will have to satisfy
consumers
What is aggregative economics?
The meaning of aggregate is sum of different
parts.
Thus aggregative economics is economics
which study the phenomenon at the aggregate
level. It is also called Macro-economics. Here
we study the collectives like national income
etc. As against this micro economics studies
only individual firm and studies variables like
pricing by firm
Is economics a normative
science ?
Yes – as per scholars like Robbins etc.

Normative means what is ideal – so economics
suggests ideal means of economic system. It
not only studies the existing system but also
suggests what should be done.
What is utility ?
The capacity of goods to satisfy a consumer is

called utility
it differs from consumer to consumer. Can it be
measured : as per cardinal utility approach –
yes – it can be exactly measured and quantified
– as per ordinal utility approach – yes – but it
can only be ranked – you cant quantify it.
What is total, average and
marginal utility ?
Suppose you eat 1 Roti and get satisfaction of 12 units, your
total utility (TU), Marginal Utility (MU), and average utility
(AU) are all same = 12. Now suppose you eat one more Roti
and get satisfaction of 4 units from this. Now your TU is 16,
and AU is 8 (average is obtained by dividing TU by number of
units). Now your MU is 4 (MU means utility from last unit
consumed). Now you eat one more Roti and get 0 unit of
satisfaction. Now your TU is 16, AU is 5.3 and MU is 0. Now
you eat one more Roti for -4 units of utility. Now you TU is
12, AU = 3, MU = -4. (ideally a consumer will stop – when it
goes into negatives)
TU curve is always going up until MU is positive, AU& MU
curve are falling.
Who said economics is study of
distribution of wealth
Answer : Ricardo
(Adam Smith only focussed on creation of
wealth).
Who said economics is study of
welfare aspects ?
Pigou : where welfare is related to money –

there is economics
Who said the economics is not
study of just wealth but study of
well-being of society
Marshall
What is law of supply ?
Producers will produce and sell more when

prices increase and will produce and sell less
when prices fall.
(it is opposite of law of demand – which says
consumers will demand more when prices fall
and vice versa).
What is elasticity of supply ?
Elastic means speed and direction of response

if you increase price and immediately there is increase
is supply, you can say that supply is elastic, if you
decrease price and immediately there is decrease in
supply, you can say it is elastic. But if there is no
change in supply in response to change in price, the
supply is in-elastic. It is measured by the following
formula :
% change in supply of quantity / % change in price
What is elasticity of demand?
Elastic means speed and direction of response

if you increase price and immediately there is fall in
demand, you can say that demand is elastic, if you
decrease price and immediately there is increase in
demand, you can say it is elastic. But if there is no
change in supply in response to change in price, the
demand is in-elastic. It is measured by the following
formula :
% change in demand of quantity / % change in price
What are factors of production?
All those things which are used in production

process are called factors of production.
Some of the factors are : land, labour, capital,
technology, entrepreneurship etc.
However, for simplicity, we combine them into
only two factors – labour and capital.
What is law of equi-marginal
utility ?
It is assumed that consumer is rational (wise,

and able to differentiate). Consumer selects
each item of consumption very carefully and
tries to ensure that the marginal utility of each
item consumed is equal. The consumer tries to
ensure that the marginal utility of each item is
equal. This is a rational process.
What is the law of variable proportions ?
It is related to law of production in the short term.

There are two factors of production : Labour and Capital
It says that in the short term, one factor (Capital) is constant and other
factor (labour) is variable and different levels of production combinations
are possible due to change in labour. We can have increasing, constant or
decreasing returns (three types of returns). Thus we can find an ideal
combination of factors of production.
It can be possible in long term also – when there is one ideal combination -
which give best production. But generally , we talk about it in short term
reference.
What is the law regarding
constant returns ?
As against the law of variable proportion, the

law of constant returns assumes that there is
same return. It is related to long term. It
assumes that in the long run all the
combination of various production
possibilities give you same ideal point. In long
term, variable returns is also possible as per
previous concept.
Define the concept of economies of scale
This is related to law of variable proportion. As

per variable proportion, we say that you can
have different production economies at
different level. Why is it so ? It is due to some
factors – some internal and some external.
These factors either facilitate or hinder
productivity – if they facilitate, there is
economy of scale – if they hinder – there is
diseconomies of scale.
What is internal economies ?
The factors which are internal to the
organisation, are called internal factors. These
factors facilitate the productivity process and
thus they contribute to economies of scale.
These factors are : 1. administration
2.advertising 3. production scale 4. supervision
5. inventory management 6. training and
development, 7. research and development etc.
What are external economies ?
These factors are external to the organisation

and they may contribute to economies of the
firm :
they are : 1. transportation cost 2.
specialisation 3. information 4. market share 5.
access to new ideas, research, laboratories etc.
Why does average variable cost curve
have a U-shape both in the short run
and long run ?
Variable cost = cost related to variable factors of
production like labour
According to law of variable proportion, with a
given plant, returns to variable factors pass
through three phases of increasing, constant and
diminishing returns. Accordingly, AVC curve is a
U-shaped one. In the initial stages, it slopes
downwards with an increase in output. Thus we
can have an ideal point – where the cost is
minimum.
Differentiate between returns to scale
and returns to a variable factor
These are the two laws of production, one

refers to short term and the other refers to long
term. Returns to scale is related to long term
(when all the factors are variable). Returns to a
variable factor (or law of variable proportion is
related to short term - when only one factor is
variable).
What is consumer equilibrium?
It is a psycholocial status about consumer – the
consumer tries to spend money wisely. When
the consumer is able to derive optimal
satisfaction by spending mony on two products
– this point is the point of our attention.
Consumer equilibrium refers to the point,
where the consumer is able to make a choice
about combination of two products. This point
may change with change in income / price of
goods etc.
CONSUMER EQUILIBRIUM ...
When consumers make choices about the quantity of goods
and services to consume, we assume that their objective is to
maximize total utility. In maximizing total utility, the
consumer faces a number of constraints, the most important
of which are the consumer's income and the prices of the
goods and services that the consumer wishes to consume.
The consumer's effort to maximize total utility, subject to
these constraints, is referred to as the consumer's problem.
The solution to the consumer's problem, which includes
decisions about how much the consumer will consume of a
number of goods and services, is referred to as consumer
equilibrium. Thus it is a part of concept of utility.
How does consumer equilibrium
change ?
Consumer equilibrium changes with change in price,
change in income of consumer etc
Consumer equilibrium is directly related to consumer
indifference curve. Consumer indifference curve
shows that the cosumer is indifferent between two
products. Suppose Pawan is indifferent between
eating 4 Samosa or 4 Kachori and also between
3S+1K or 1S+3K and derives equal satisfaction from
these options, then the combination of these points
will give us Indifference curve.
What is difference between
cardinal and ordinal utility?
Cardinal theory : utility can be measured.

Ordinal utility : we can only give grading of
utility – but we cannot exactly quantify utility.
What are the concepts of total revenue,
average revenue and marginal revenue
of a firm.
Suppose you sell 1 unit for Rs. 12, your total revenue
(TR), Marginal revenue (MR), and average revenue
(AR) are all same – 12. Now suppose you sell one more
unit in Rs. 20, your TR is now 32, AR = (32/2)= 16,
MR = 20. Now suppose you sell 3rd unit in Rs. 8. What
is your TR, MR, AR
TR=40, AR=13.33, MR= 8
TR curve is always going up with quantity, AR & MR
curve are constant in perfect market, but falling in
imperfect market
What are the salient features of a
socialist economy
There are three types of economic systems : 1.

capitalism = where market forces are allowed to play
their role and there is minimum government
intervention and emphasis on private sector and profit
motive. 2. Socialism: where everything is regulated by
government and there is equality of distribution of
resources. Only public sector exists. 3. Mixed economy
: both private sector and public sector (govt) play
important role
What do you understand by market
mechanism
In capitalism, market forces play their own

role. They decide about the prices and about
other factors. Market mechanism include
forces like total demand, total supply etc. It is
not controlled by government in capitalism. In
perfect market, market forces decide prices.
Thus price is a point of equilibrium of demand
and supply.
What is ISO-Product / isoquant?
Suppose 3 units of labour and 30 units of
capital give you same production as you can
get from 20 units of labour and 4 units of
capital, these two points can be put on a curve
called ISOQUANT. Isoquant is a combination
of all such points, on which combination of
different factors of production give you same
level of output.
Iso =same, quant = production in quantity
What is least cost combination of
factors of production?
We can find a point where we can get optimal

production, this point is called least cost
combination of factors of production. You can
find it on ISOQUANT also.
WHAT IS DIFFERENCE
BETWEEN MICRO AND
MACRO ECONOMICS ?
Micro focuses on an individual, but macro

focuses on the group of firms / group of
individuals or complete nation / world.
Micro focuses on individual problems, but
macro focuses on major issues
What is the difference between
static and dynamic economics ?
Static econmics assumes that factors of

production and resources are fixed, but
dynamic economics assumes that these are
changing.
What is cobweb theory?
It is a part of dynamics, it assumes that the

forces of demand and supply decide the point
of equilibrium and therefore these forces play
an importnat role.
Who says that the rules of
economics are not firm as the
rules of gravitation?
Marshall
What is the basic model of
national income?
Y = C+I+G+ (X-M)
Y = National Income
C = consumption
I = Investment
G=Government expenditure
x = Export
M = Import
At consumption of 35 units, your satisfaction
is 900 units, at consumption of 36 units, your
satisfaction is 800 units, is it possible
Yes – under diniminishing marginal utility – it

is possible that you can have negative marginal
utility – so here there is negative marginal
utility of -100
Remember, it is within the perview of Cardinal
Utility theory – (cardinal utility theory says
that utility can be measured).
You derive equal satisfaction by eating 2
Kachori + 1 Malpua or alternatively : 2
Rosgulla + 2 Bikaneri Samosa. What
economic theory is applicable here?
LAW OF EQUI-MARGINAL UTILITY
WHO TALKED ABOUT
CONSUMER'S RENT IN 1879?
Marshall
Who talked about indifference
curve for the first time?
Hickks
What is indifference curve ?
When a consumer is indifferent between two

options, it is presented in the form of a graph
and it is called indifference curve
Each point on this curve shows combination of
two commodities giving equal satisfaction. For
example at Point X, Pawan gets equal
satisfaction either he eats 10 Rosgulla or 10
Jalebi.
Example :
In the above graph, you can see that each curve

on the graph shows a level of satisfaction –
which is again a locus of points.
What is consumer surplus?
From 1st unit, Pawan gets satisfaction of 10
unit, from second unit : 6 units of satisfaction
from 3rd unit he gets satisfaction of 2 units, but
acually pays equal to 2 units for each. Thus his
surplus is :
(10-2) + (6-2) + (2-2) = 12 units.
Thus Pawan has positive consumer surplus
(difference between what he gets and what he
pays).
Who says that money has static
marginal utility ?
Marshall
but Hickks says that money's marginal utility is
also changing
What are the exceptions of law of
demand?
As per law of demand – demand has inverse
relation with price. Demand curve is convex to
origin. .
Exceptions are :
1. emergency 2. expectation of further rise /
fall in price 3.Inferior goods (Giffin goods) 4.
High priced / luxury goods 5. Conspicuous
goods 6. Necessities 7. Ignorance
What are Giffin goods?
These are inferior goods – for example Jawar is

inferior goods for eating (in comparison to
wheat), similarly second hand cloths are giffin
goods in comparison to Ready Made
Garments.
What is elasticity in demand ?
% change in demand in response to % change

in price.
Suppose demand change 10% ,when there is
5% chnge in price, we can say that elasticity is
2 times (highly elastic demand).
What factors influence elasticity
of demand ?
Factors : 1. nature of commodity (necessities

have inelastic demand, but normal goods have
elastic demand). 2. Substitute goods (if there is
no substitute goods, the demand may be
inelastic), 3. possibility of postponement of
consumption 4. Price 5. income level of
consumer etc.
What is difference between
positive and normative science
Positive science : it states the problem as it is

without any suggestions
Normative science : it tries to solve the
problems and give suggestion. It looks into the
ideal conditions and tries to tell you what
should be the ideal.
Who says : Economics is the
study of nature and causes of
wealth of nations
ADAM SMITH
WHO SAYS : ECONOMICS IS
THE SCIENCE WHICH
STUDIES WEALTH
J.B. SAY
WHO SAYS : “ECONOMIC
WELFARE IS THE SUBJECT
OF STUDY OF ECONOMICS.
ECONOMIC WELFARE IS
THAT PART OF SOCIAL
WELFARE THAT CAN BE
BROUGHT DIRECTLY OR
INDIRECTLY INTO RELATION
WITH THE MEASURING ROD
OF MONEY
SOLUTION
PIGOU (well known welfare economist)
Who says : economics is the study
of human behaviour as a
relationship between ends and
scarce means which have alternate
uses.
Robinson
What are assumptions of
consumer's surplus
Demand can be measured

law of diminishing marginal utility
perfect competition
static marginal utility of money
independent goods
etc. (other things remain same. )
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ECONOMICS FOR

Consumer is the king

Yes – as per scholars like Robbins etc.

The capacity of goods to satisfy a consumer is

Pigou : where welfare is related to money –

Producers will produce and sell more when

Elastic means speed and direction of response

Elastic means speed and direction of response

All those things which are used in production

It is assumed that consumer is rational (wise,

It is related to law of production in the short term.

As against the law of variable proportion, the

This is related to law of variable proportion. As

These factors are external to the organisation

These are the two laws of production, one

Cardinal theory : utility can be measured.

There are three types of economic systems : 1.

In capitalism, market forces play their own

We can find a point where we can get optimal

Micro focuses on an individual, but macro

Static econmics assumes that factors of

It is a part of dynamics, it assumes that the

Yes – under diniminishing marginal utility – it

LAW OF EQUI-MARGINAL UTILITY

When a consumer is indifferent between two

In the above graph, you can see that each curve

These are inferior goods – for example Jawar is

% change in demand in response to % change

Factors : 1. nature of commodity (necessities

Positive science : it states the problem as it is

PIGOU (well known welfare economist)

Demand can be measured

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