Type equation here.

Evolution of Economics
When early man got to know that food eliminates the hunger, he started looking for ways to tap
nature and its resources to meet his demand of meal. Hunting and fruit collection eventually led to
evolution of farming and cultivation. Then started the domestication of animals and construction of
houses. The invention of wheel created a boom in transportation of materials. Since bartering was
an inconvenient and often impractical way of trading, the need of a common medium of exchange
was felt. Necessity, the mother of Invention, gave rise to money, or currency as we call it today.
It didnt take long to establish that money was a fundamental thing that could satisfy most of the
needs of people. Trade and commerce led to exploration towards the practise of earning and
spending money, which gave birth to Economics. So Economics is the branch of social science that
deals with ways of the production, distribution and consumption of goods and services.

Transformation of Economics
In earlier days, businessmen controlled the direction of the market. They were the ones who
produced whatever they wanted, and sold them at whatever prices they felt like. It was an era
where most people had monotonous lifestyle, i.e., they usually would live on the way there
forefathers did and stay and work in their family profession, often spending their entire lives at their
birthplace. Thus it was the age of Producer-Oriented Economics where Producers or factory-owners
had a complete monopoly over the market.
With the development of roads, transport and machines, trade and commerce started flourishing.
Producers could now serve much wider audience and so people had more choices than ever in
deciding what kind and quality of products they would use and what prices they would pay. In this
way, the ball went in the hands of consumers, once they realised that the producers fate was tied to
their choice. This trend of Consumer-Oriented Economics where peoples choices regulate the
growth of the market and industries continues to this day.

Classification of Economics based on factors taken into account

The early economists postulated that Economics not just deal with production-consumption affair,
but rather seeks to answer the following key questions for firms and industries that produce goods
and services:
1. What to produce?
2. How to produce?
3. For whom to produce?

Introductory Economics
It tries to answer the first two questions listed above. In other words, it aims at maximising the
revenue by producing products that offer good profit margin and adopting methods of production
that minimizes the cost of production. Therefore, it tackles the situation from the Producers
viewpoint.

Managerial Economics
In addition of Introductory Economics, it tries to answer the third question listed above. Thus, it
takes into account the consumers viewpoint, giving due attention to their needs and the kind of
goods and services that could meet their demands.
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Classification of Economics based on scale

Micro Economics
This pertains to earning and spending of capital by individuals and firms. Therefore it takes into
consideration a small geographical area with the number of people remaining confined to few
hundreds.

Macro Economics
Macro Economics is concerned with exchange of money between millions of people distributed over
a vast geographical area, viz. a country. It tries to determine the trend of the society as a whole
towards goods and services available to them.

Definitions of Economics
Adam Smith
Economics is a study of nature and causes of wealth of nations.
The central point in Smiths definition is wealth creation. Smith states Economics as a subject in
which we study production, distribution and consumption and exchange of wealth. Using the
premise that wealthier a nation is, happier it becomes, Smith regarded economics as a subject that
tells us how to make countries wealthier.

Alfred Marshall
Economics is a study of man in the ordinary business of life. It enquires how he gets his income and
how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important
side, a part of the study of man.
Marshalls definition is widely regarded to be welfare-centric. It stresses on study of material
requisites for well-being, concentrates on the ordinary business of life and stresses on role of man in
creation of wealth or income.

PA Samuelson
Economics is the study of how men and society choose, with or without the use of money, to employ
scarce productive resources, which could have alternative uses, to produce various commodities over
time and distribute them for consumption, now or in near future, among different people and groups
in society.
Samuelsons definition could be seen to harmonize with the modern understanding of Economics for
it describes producers perspective of wealth-generation. Here with or without use of money
indicates continuous or one-time investment in business.

Economics An Art or a Science?

Why is it a Science?
To a large extent, Economics works in the scientific manner of collecting data or facts, then
systematically analysing and testing to understand the behaviour or pattern of that data set. At the
same time, however, this may not hold true universally, because even though Economics works in
this scientific manner, the outcome or results are not the same as predicted as are in natural
science. Both science and economics attempt to construct models that are then used to explain and
predict more phenomena.
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Normative or Dismal Science?

Normative Science is based on statements of facts that can be tested against figures to test its
validity. Dismal Science, on the other hand, debates on statements of value: statements about what
ought or ought not to be, about whether something is good or bad, desirable or undesirable etc.
Despite using similar models to the natural sciences, Economics lacks the ability to make precise
predictions with accuracy. It is therefore often treated as dismal science.
Some reasons for this are:

Inability to conduct controlled experiments like physics, chemistry

Even though thinking of general public could be broadly estimated, extrapolating the
individual behaviour on a large scales limits the accuracy of the predictions. Thus,
involvement of human behaviour, makes it controversial.

The models Economists make cannot be proved or disproved by a simple appeal to fact
Economists can only contribute in a positive way to questions of policy. That is they can
analyse the consequences of following certain policies.

Why is it an Art?
Art deals with the application of a premise or a scientific theory, to produce or formulate things that
may or may not follow mathematical equations or strict rules. For instance, as per Robbins, an
individuals choice of best possible alternative depends upon his past experiences. Thus, tackling the
practical problems that arise upon applying some scientific theory, by learned skills, is nothing but an
art. Economics is largely the study of how people make decisions. Irrespective of the mathematics
involved in Economics, its core basis is on the behaviour of people. If any model tries to predict this
behaviour (scientific approach), it definitely is at fault.

Why is it both Science and Art?

Economics is a science since it deals with measurable quantities prices, volume and
unemployment, growth rate etc. But given that there several ways to explain relationships between
these quantities, and choosing between them is primarily based upon intuition rather than logicEconomics is an art.
So, while Economics is a science, whose principles can be described through mathematics and whose
results can be predicted with some level of confidence, it is not deterministic, and the element of
uncertainty makes Economics an art. Economics is that kind of a subject that has both tests at the
same time, a science and an art.

Consumption
The final purchase of goods and services by individuals is referred to as Consumption. Consumption
occurs as a direct result of availability of goods and services as well as ability and willingness of
people to pay for them. There is a slight difference between Consumption and Consumption
expenditure: because durable goods, such as automobiles, generate an expenditure mainly in the
period when they are purchased, but then they produce services like transportation services, until
they are replaced or scrapped.

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Types of consumption are:
Final
Productive
Quick or fast moving
Slow

Exchange
Exchange is an economics term whose function is to ensure fair and orderly trading, as well as
efficient dissemination of price information for any securities trading on that exchange. Exchanges
give companies, governments and other groups a platform to sell securities to the investing public.

Distribution
For a good or service, Expanding the reach of a product throughout the marketplace, so that
maximum no of people can buy it, is called Distribution.
In general, Distribution in economics refers to the way total output, income, or wealth is distributed
among individuals or among the factors of production such as labour, land, and capital.

Demand Analysis
Concept
Demand refers to the amount of goods that consumers or buyers are willing to buy, and are capable
of buying, at a specific price in a specific time period while keeping all other factors constant or
unchanged. Demand is therefore an economic principle describing desire of consumers to purchase
specific goods or services.

Demand is always related to price and time: Demand, being a relative concept, should
always have a reference to price and time. Thus demand for a commodity is always
expressed with reference to Price and specific time period, such as per day, per week, per
month or per year.
Demand may be viewed ex-ante or ex-post: Ex-ante demand is the intended demand or the
potential demand and ex-post demand is what is already purchased, or the actual
magnitude demand.
Demand may be direct or derived: Consumers demand is a direct demand as it directly
yields satisfaction to the consumer. Consumption goods have direct demand. Producers
demand for factor-inputs is a derived demand as it is derived from the demand for the final
output. All capital goods have derived demand.

Kind of Demand
Demand forecasting is an essential activity for it helps firms to plan its inventories so as to avoid
both stockpiling as well as under-utilization of resources. In this context, two broad types of
demands are taken into account:

Individual Demand: Individual demand pertains to demand of an individual or a firm. It

represents the quantity of a good that a single consumer would buy at a specific price point
at a specific point in time. Although somewhat vague, individual demand can be represented
by the point of view of one person, a single family, or a single household.

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Market Demand: Market demand provides the total quantity demanded by all consumers. In
other words, it represents the aggregate of all individual demands.
i.
Primary demand is the total demand for all of the brands that represent a given
product or service, such as all phones or all high-end watches.
ii.
Selective demand is the demand for one particular brand of product or service, such
as the iPhone or a Michele watch.
Market demand reflects the willingness of consumers to buy certain. A low market demand
is an indication that the concerned product or service should either be terminated or repackaged to make it more appealing to customers.

Change in Demand
A change in one of the demand determinants results in a shift of the demand curve, known as
Change in Demand. A change in demand is caused by any factor affecting demand except the price
of the commodity. The five demand determinants (buyers' income, buyers' preferences,
other prices, buyers' expectations, and number of buyers) are responsible for causing a
change in demand.

Factors influence individual demand:

1. Price of product
2. Income
3. Tastes and habits
4. Relative prices of goods
5. Consumers Expectations
6. Advertisement Effect
Factor influencing market demand:
1. Price of demand
2. Distribution of income and wealth in the community
3. Community's common habits and scale of preference
4. General standards of living and spending habits of the people
5. Number of buyers in the market and growth of population

Law of Demand
The Law of Demand tells that an inverse relationship exists between price and the quantity
demanded, all else remaining constant. With increase in price, quantity demanded decreases and
vice-versa.
1. Substitution Effect: When the price of a good or product decreases, the lowered relative
price of that product makes it a better deal for the buyer. In this way, the price of one
product is contrasted with the prices of other products, thus causing the substitution effect.
Consumers usually substitute towards the cheap or less expensive product.
2. Income Effect: If income is measured in terms of the services and goods that one can
purchase, then a depreciation in price of goods and services leads to increase in real income,
even if the nominal income remains constant. This is due to increased purchasing power of
the individual.

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3. Change in Consumer Income: If income increases, demand for normal goods will increase,
and vice-versa. Contrary to that, if income increases, demand for inferior goods decreases,
and vice-versa.
4. Change in Related Goods Price: If price of one good is increased, more consumers will buy
the other relative good and vice-versa.
5. Change in Consumer Expectations: If a consumer expects his or her income to rise in the
future, the existing demand will increase and vice-versa.
Assumptions:
No change in tastes and preference of the consumers.
Consumers income must remain the same.
The price of the related commodities should not change.
The commodity should be a normal commodity.
Exceptions to the law of demand:
Inferior goods
Articles of Distinction
Expectation regarding future prices
Emergencies
Ignorance

Utility Analysis
Utility is the measure of usefulness of something. In Economics, Utility describes the amount of
satisfaction a consumer gets from a good or service that he/she purchases.

Marginal Utility
The additional satisfaction or gain someone gets from using or purchasing an additional unit of a
particular good or service is referred to as Marginal Utility. Mathematically, it is expressed as the
ratio of change in total utility and change in the quantity consumed.
=

Total Utility
The total satisfaction derived by the consumer from the consumption of a given quantity of a good is
called its Total Utility. Each individual unit of a good or service has its own marginal utility. Hence, by
its definition, Total Utility can be expressed as the sum of marginal utilities of individual units
consumed. According to the Classical economic theory, consumers aim to obtain the highest possible
level of total utility against the money spent by them.
=

Law of Diminishing Marginal Utility

Marshall, in his book, states thatThe additional benefit a person derives from a given increase of his stock of a thing diminishes with
every increase in the stock that he already has
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In this way, the law of diminishing marginal utility explains the downward sloping demand curve.
With increase in the quantity of a commodity is consumed, both the intensity of desire and the
utility derived from the additional unit decrease. This can be elaborated by the following example:
Suppose a person eats Bread and 1st
slice of bread gives him maximum
satisfaction. When he will eat 2nd slice of
bread, his total satisfaction would
increase. But the marginal (extra) utility
added by 2nd bread is less than the 1st
bread. His Total utility and marginal
utility is listed in the table alongside.

Law of Equi-Marginal Utility

In Marshalls words:
If a person has a thing which can be put to several uses, he will distribute it among these uses in
such a way that it has the same marginal utility in all.
The law of equi-marginal utility comes into picture to explain the behaviour of a consumer upon
concumption of more than one commodity. Although wants are unlimited but the available income
is always limited. This law explains how the consumer spends his limited income on various
commodities to get maximum satisfaction.
For this reason, the law of equi-marginal utility is also called the law of substitution or law of
maximum satisfaction or the principle of proportionality between prices and marginal utility.

Consumer Surplus
Consumer Surplus is a measure of the economic welfare that people gain from purchasing and then
consuming goods and services. It occurs when the consumer is willing to pay more than the market
price of a product. There could be two possible circumstances leading to such a situation:

Attractive offers, discounts and other benefits on purchase of products

Shortage of some commodity of basic need such as petrol

Quite likely, Consumer Surplus may lead to black marketing and inflation, because of the
opportunity offered to sellers. Here the quantity demanded shoots up supply soon starts trailing the
demand. In terms of Utility, Consumer Surplus means that Total Utility of the product is very high,
and even the Marginal Utility is high.

Consumer Equilibrium
Consumer Equilibrium is achieved when the market price of a product matches the amount that the
consumer is willing to pay for it. In other words, consumer equilibrium indicates that a product is
optimally priced, so as to derive maximum profits while delivering adequate satisfaction to
consumers and maintaining balance between demand and supply. All market analysis firms as well
as manufacturers seeks to attain Consumer Equilibrium. Consumer Equilibrium indicates that
Marginal Utility of the product is low.

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