By

Currenc-I Club, IIM Indore

Aditya | Arjit | Priyadarshini | Sandesh |



The two major divisions are Macro and Micro

Economics
Macro : Provides a holistic view about the
economy that covers GDP, Inflation, Monetary
and fiscal policies, Unemployment, BOP (
balance of payment) and growth rate of the
economy etc.
Micro : Analyses the individual decision
making units which covers the factors that
affect the demand and supply, prices of the
goods and elasticity etc.

Demand & Supply

Demand- Quantity expected to be

purchased by consumers at different
price levels
Supply- Quantity supplied by the
industry at different price levels
As the price of good increases demand
falls (consumers do not prefer the good
due to high price) and supply increases
(manufacturers gets more revenue due
to increased price)
Hence demand is a downward sloping
and supply is an upward sloping curve
Equilibrium level is given by the point
of intersection and the corresponding
price is equilibrium price



Elasticity is a measure of ratio of percentage change

in one variable to percentage change in other variable
Price Elasticity Measures change in quantity
demanded in response to change in price of the good

Price Elasticity = Q(%age Change in Demand) / (P %age change in Price)

Income Elasticity- Measures percentage change in

quantity demanded due to change in income
Income Elasticity = Q(%age Change in Demand) / I(%age change in
Income)

Note- The above quantities measure price and

income elasticity of demand. Similarly there can be
elasticity of supply where the numerator is replaced
with change in quantity of supply.

The demand is perfectly

elastic at price $15
At any other price point
demand is zero
This is an example of
perfectly elastic demand
curve
The curve is also called
infinitely elastic curve

This curve represents

perfectly inelastic or
zero elastic demand
curve
The curve shows that
the demand remains at a
particular quantity
irrespective of the price
level
The same can be applied
for the supply side curve
E.G. There can be
perfectly inelastic supply
curve

There are four different types of markets

Perfectly competitive
Monopoly
Monopolistic competition
Oligopoly



There are many players with each one holding

a small market share
There are no entry and exit barriers i.e. It is
easy to enter and exit the business
All the products produced by different
manufacturers are identical
Prices are determined by demand and supply
of the product, not by the firm
Perfectly competitive firms have perfectly
elastic demand curve

There is one supplier in the entire market who

produces a product which is exclusive and has no
good substitutes
The barriers to entry are very high
Legal Barriers
Natural Barriers

Patents copyrights and government franchisees

are few legal barriers
Natural Barriers- A firm can reduce the cost of
production by producing more (Economies of
Scale) and they sell at a cheaper price which
cannot be done by other players



Large number of competitors produce

differentiated products
Product differentiation gives degree of
market power to each firm
Firms compete on price quality and marketing
due to product differentiation. Quality is a
significant product differentiation
characteristic and price is set by the firms
based on the demand supply relation
Barriers to entry and exit are low and hence it
is easy to enter and exit the business

The market is characterized by small number of

sellers
There is interdependence amongst the sellers
and hence decision by player is affected by other
players decisions
Products may be differentiated or similar
Significant barriers to entry due to which each
firm has large economies of scale. Due to
significant barriers of entry there are very few
players who supply the entire market hence they
have large economies of scale

 Total Market value of all final goods and Services produced within
an economy
GDP

Check out GDP/NDP/GNP

Rate of changes in price

Inflation

Find out the two main indexes for inflation measurement

Real interest rate is the rate at which your money grows after
accounting for inflation
Interest Rates

Find out the difference between Real and Nominal Interest rates

Revenue Deficit: Revenue Expd Revenue

Receipts
Fiscal Deficit: Total Expd ( Revenue
Receipts+ Recovery of loans + Receipts from
PSU disinvestment)
Primary deficit: Fiscal Deficit- Interest
Payments

Government and RBI uses various tools to

influence the growth of the economy
Monetary policy (RBI)
1.
2.

Fiscal policy
1.
2.

Control money supply

Control interest rates
Manage the government revenue
Manage government expenditure

Find out: <CRR,

<CRR, Repo rate, reverse repo, SLR>

For any queries contact

currenci@iimidr.ac.in