Module I.

Subject matter of economics

Why study of Economics is important
Definitions of Economics
Branches of Economics
Classification of the economy
Sectors of the economy
Private and Public sector
Organized and Unorganized sector
Demand
Functions of Demand
Law of Demand
Assumptions of demand
Demand schedule
Demand curve
Why demand curve slops downward
Types of demand
Exceptions of law demand
Elasticity of Demand and Its Types
Supply
Supply function
Determinants of Supply
Law of supply
Supply schedule
Supply curve
Market supply curve
Market supply curve
Price elasticity of supply
Equilibrium
Pricing Methods
Scope of and subject matter of Economics

Almost all economics in the world has explained and stressed the importance of subject
matter of economics and its scope. The economic thinkers like Adam Smith to Pigou have
defined subject matter of economics as the study of subject matter of economics as the study
of cause of material welfare or as the science of wealth. While Alfred Marshal confined to
consumption production, exchange and distribution of wealth by ordinary business of life

Why study of economics is Important?

The word economics originated from the Greek word, Oikonomos means household
management. Household making much decision. Study of economics is important in the
sense that it affects the day to day life of the common man. The economic knowledge can be
used for initiating the eradication of poverty, generate employment. Rather than this there are
many other things like, inflation, food, stagnation, recession, population explosion, adverse
balance of payments, growth, Percapita income, National income for all of these economic
matter can be studied in the subject of economics. These all are common things but without
understanding of the subject of basic economics one cannot understand these influential
factors in the economy.
The subjects like Physics, chemistry, political science, sociology etc. has their own
importance in the society and they are having their own method of understanding. Like that
economics is also having its own importance. One of the importance of economics in the
society it explains how the scarce resources in the society will be utililies very efficient way,
in other words, the economics subject explains the how the resources allocation taking place
in between the limited resources and un limited wants. So in the definition of economics each
economics highlighted those things.
When we talk about the engineering and economics, both are closely related. Economics as
the social science for earning better living standards while engineering is the physical science
to applying to helping groups of men to make a better living.Engieers are undertaking many
projects and if these projects are not cost effective all will go on veil. When engineers
undertake any projects if the cost effective only it may benefit to the owners of the projects as
well as the engineers financial position. When consider the time value of money, it is the
central to most engineering economic analysis. Some of the topics that may be addressed in
engineering economics are inflation, uncertainty, replacements, depreciation, resource
depletion, taxes, tax credit, accounting, cost estimations or capital financing. All these are
primarily skilled and knowledge areas in the field of engineering.
Definitions of Economics:

1. Adam Smith, Father of Economics has given a definition of economics in his book An
enquiry in to the nature and Causes of Wealth of Nations which was published in 1776.
According to him economics is basically deals with the factors that determine the wealth of a
country. And this book also tells us that a country cannot grow without the proper utilization
of its resources. So when a country progress it needs the fullest utilization of the resources. If
we take any country in the world who has developed because of its fullest utilization of the
resources. He is also emphasis the production for generating the economics.

2. Then Alfred Marshall, Welfare Definition.

It has given an important definition of economics, that is the welfare definition, means
according to him economics is on one side is the study of wealth and on the other, is the most
important side is the study of man. He had given a human concept regarding the economics.
And economics can use for the material satisfaction of human being. In his definition of
economics he tried to define in welfare rather than pure wealth oriented definition of Adam
Smith. One economy progress it would not harm the welfare of the people in the
society/country.

3. Lionel Robbins, scarcity definition.

According to him the study of economics is important in the sense that the wants are
unlimited and resources are scarce. So according to him the economics is the science of
scarcity and it studies how the scarce resources are allocated among their different uses. And
he is explaining how the scarce natural resources will be distributed equally to satisfy the un
limited wants.

4. Pual Samuelson. Growth Definition.

According to Samuelson, a country should use its productive resources to produce various
goods and then distribute them for current and future generations.
Thus there are five points in his definition

1. Efficient allocation of resources

2. Dynamism (time element)
3. Problem of Choice
4. Improvement in resource allocation
5. Distribution

The country like India, has the problems like, poverty, unemployment, inequality, illiteracy,
GDP, Percapita Income, GNP, inflation etc.. so for analyzing these factors the study of
economics is required, so the introduction to economics has specifically deals with the all
these issues.

Branches of Economics.

When talks about the economics, people must be understand what are the basic branches of
economics. Basically economics has been divided in to two like micro economics and
macroeconomics. Until 1936, there were one economics which is called the micro economics,
the great depressions in western countries has led to the emergence of macroeconomics by
the introduction of JM Keynes book General Theory of Employment Interest and Money in
which he vehemently criticizing the policies of micro economics which leads to the great
depression in 1930s.
MICRO ECONOMICS

How consumers and producers interact to settle prices of goods and services in the
market
How individual consumers and producers make their choices
Individual Analysis
How prices are determined in different market settings
Supply and demand in individual markets
Individual consumer behaviour. e.g. Consumer choice theory
Individual labour markets e.g. demand for labour, wage determination
Externalities arising from production and consumption. e.g. Externalities

MACRO ECONOMICS

Aggregate Analysis
How the level of national income including national income, aggregate consumption,
aggregate savings and investment, total employment, general price level, and
countries balance of payments are determined
Determination of national output
Impact of changes in monetary and fiscal policy
Economic relations between nations
Monetary / fiscal policy. e.g. what effect does interest rates have on the whole
economy?
Reasons for inflation, and unemployment
Economic growth
International trade and globalization
Reasons for differences in living standards and economic growth between countries.

BASIS FOR
MICROECONOMICS
COMPARISON
Meaning The branch of economics that
studies the behavior of an
individual consumer, firm,
family is known as
Microeconomics.
Scope Covers various issues like
demand, supply, product
pricing, factor pricing,
production, consumption,
economic welfare, etc.
Importance Helpful in determining the
prices of a product along with
the prices of factors of
production (land, labor, capital,
entrepreneur etc.) within the
economy.
Limitations It is based on unrealistic
assumptions, i.e. In
microeconomics it is assumed
that there is a full employment
in the society which is not at all
MACROECONOMICS
The branch of economics that studies the
behavior of the whole economy, (both
national and international) is known as
Macroeconomics.
Covers various issues like, national
income, general price level, distribution,
employment, money etc.
Maintains stability in the general price
level and resolves the major problems of
the economy like inflation, deflation,
reflation, unemployment and poverty as a
whole.
It has been analyzed that 'Fallacy of
Composition' involves, which sometimes
doesn't proves true because it is possible
that what is true for aggregate may not be
true for individuals too.
 possible.

Thus micro economics study consists of theory of consumer behavior, theories of production
and cost, theory of commodity pricing, theory of factor pricing and most efficient allocation
of resources.
While in macroeconomics the study consists of the study of aggregate like national income,
total employment, total output, total saving, total investment etc.

Classification of the economy

Closed Economy vs Open Economy

In todays modern economies, international trade plays a vital role. International trade ensures that
countries produce and export products and services efficiently at a lower cost and import other
products and services that they cannot produce efficiently from a country that can. Such an economy
is called an open economy. A closed economy is a self-sufficient one that depends 100% on local
production of all needed goods and services. The following article explores these terms in greater
detail and provides a detailed explanation of their similarities and differences.

Open Economy

Open economies as the name suggests are economies that maintain financial and trade ties with other
countries. In an open economy, countries will trade import and export goods and engage in
international trade activities. An open economy also allows corporations to borrow funds, and banks
and financial institutions to lend funds to foreign entities. Open economies will also trade
technological knowhow and expertise.

Open economies have been encouraged, and many open economies exist through international trade
agreements and economic and political unions. The North American Free Trade Agreement (NAFTA)
is a free trade agreement between the US, Canada and Mexico, and the European Union (EU) is a
union between 27 member states in Europe to encourage economic and political corporation. Such
trade unions allow member countries to specialize in the production of goods and services (for which
they have the right geographic landscape, resources, cheap labour, etc.) which they can then produce
efficiently at a lower cost.

Closed Economy

A closed economy is one that does not interact with other countries. A closed economy will not
import or export goods and services, and will become self-sufficient by producing what they need
locally. The disadvantage of a closed economy is that all needed goods will have to be manufactured
regardless of whether the economy has the required factors of production. This could result in
inefficiencies which may drive up the cost of production and, therefore, increase the price that
consumers pay.

Closed economies also lose the opportunity to sell to a larger market place, and will have limited
product development opportunities due the restriction in knowledge and technology transfer. Another
disadvantage is that corporations will not have access to global financial markets, which can restrict
the funds available for investment. Furthermore, a closed economy may give dominance to local
producers who may provide a lower quality, high priced product due to lack of competition from
foreign producers.
Closed vs Open Economy

Closed economies and open economies are very different to one another in terms of the attitude
towards trade and interaction with foreign countries. Closed economies are very rare as most closed
economies have evolved into open economies over time. A closed economy does not interact with
other countries and prefers to be self-sufficient, which may hinder their growth. An open economy, on
the other hand, is beneficial to the global economy and will result in more trade, more funding for
investment, and better development of products and services.

Open Economy.

When a country/economy opens trade/trade relation with other countries is called the open
economy. That means there will be economic relation of domestic market/economy with the
international market. This type of relation in the form of exchange of goods and services, in
the form of technological transfers, in the form of intellectual transfers, in the form of labour
and capital etc. that is the no trade barriers between the country. But in the reality world
countries do not involves 100% open in their economy. Every country opens their economy
to rest of the country by keeping their best interest. This is also part of the export and import
of an economy.Al most all the countries in the world is the open economy and without the
openness in their economy, their existence in the world economy is doubtful. Government of
India also opens its economy in 1991 by the introduction of new economic policies under the
finance minister ship of DrManmohan Sigh.

Y=C+I+G+X
Means
Y= Total output in the economy
C=consumption expenditure
I= Investment Expenditure
G=Government Expenditure
X= Exports of goods and services

Closed Economy/Autarky

When a country/economy not opens trade/trade relation with other countries is called the
open economy. That means there will be no economic relation of domestic market/economy
with the international market. There will be no export and import of goods and services with
the rest of the economy. Al though in traditional period there were many autarky countries in
the world, but now there were only few of them existing like North Korea, Brazil etc. as per
the world bank calculation, the Brazil is one of the country having the lowest export in the
world, that is why it is calling as an example of the modern autarky.

In an Closed economy.

Y=C+I+G
Means
Y= Total output in the economy
C=consumption expenditure
I= Investment Expenditure
G=Government Expenditure
That means in the closed economy there will be no external or international trade. it will be
completely depends on the resources from the own territory itself.

Summary:

Open economies as the name suggests are economies that maintain financial and trade ties with
other countries.

A closed economy will not import or export goods and services, and will become self-sufficient by
producing what they need locally.

Open economies are preferred and encouraged due to the greater investment, development and
growth that result from international trade and sharing of knowledge and capital.

Sectors of Economy

On the basis of population engaged or labor force engagements in the economy, the economic
activities of any can be classified in to three basic sectors.
1. Primary sector
2. Secondary sector
3. Tertiary sector

1. Primary sector: The primary sector of the economy extracts or harvests products from the
earth. This sector includes the production of raw materials and basic goods. The activity
associated with this sector includes agriculture, mining, forestry, farming, grazing, fishing
and quarrying. The packing and processing of raw materials associated with this sector also
part of the part of the primary sector. This sector is more important in the underdeveloped
countries while the less important in the developed countries.
In 2008, the contribution of primary sector to GDP is around 17% (2008), but the 58% of the
labor force engaged in this sector (2011-12)

2. Secondary sector. This sector is called the manufacturing sector and it uses the primary
sector raw materials for the production of goods and services. Since the manufacturing is
done by the industries this sector is also called the industrial sector. The primary sector
include metal working, smelting, automobile production, energy utilities, engineering,
construction and ship buildings. The contribution of secondary sector to Indian GDP is 29%
(2008).

3. Tertiary sector. This sector is called the service sector. It sector consists of various types of
services to general population and to the business. Activities associated with this sector
includes the retail and whole sale sales, transportation and distribution, entertainment
(movies, television, radio, music, theatre etc), restaurant, clerical services, media, insurance,
tourism, banking, health care, law etc. the contribution of this sector to Indian GDP is the
54%(2008).
In most of the developing and developing countries growing proportion of workers engaged
in this sector. In US more than 80% of the workers are engaging in this sector.

The service sector of Indian economy is again divided in to two sectors like
3a.Quaternary sector. This is basically the subset of the tertiary sector of the economy, and it
is basically consists of intellectual activities. This sector consists of the media, culture and
government. The services like information generation and sharing, IT, Consultation,
education, research and development, financial planning and other knowledge based services
are part of this sector.

3b.Quinary sector. This is the basic making set of the tertiary sector. Means the highest
decision making bodies are consisting in this sector in the economy. This sector consists of
the top executives in the business, government, science field, universities, health care sector
etc.

Private and Public Sector

On the basis of the ownership, again there are two types of division, like public sector and
private sector.

Private Sector
Private sector means those sectors which are controlled and owned by the private individual
with purpose of profit motive. It is run by the private individuals or group with the main aim
is the profit. Usually those industries or firms which are controlled by the individuals are
regulated by the state laws. They are regulated by the certain laws.

Public sector
Private sector means those sectors which are controlled and owned by the government
agencies with the purpose of social welfare. It is completely controlled by the government
and their agencies. It is that part of the economy which gives the various services to the
citizens. The exclusion principle and no profit can be applicable in the public sector.

BASIS FOR
PUBLIC SECTOR PRIVATE SECTOR
COMPARISON

Meaning The section of a nation's economy, The section of a nation's

which is under the control of economy, which owned and
government, whether it is central, controlled by private individuals
state or local, is known as the Public or companies is known as Private
Sector. Sector.

Basic objective To serve the citizens of the country. Earning Profit

Raises money from Public Revenue like tax, duty, penalty Issuing shares and debentures or
etc. by taking loan

Areas Police, Army, Mining, Health, Finance, Information Technology,

Manufacturing, Electricity, Education,
Transport, Telecommunication,
Agriculture, Banking, Insurance, etc.
Mining, Transport, Education,
Telecommunication,
Manufacturing, Banking,
Construction, Pharmaceuticals
etc.
Benefits of working Job security, Retirement benefits, Good salary package, Competitive
Allowances, Perquisites etc. environment, Incentives etc.

Basis of Promotion Seniority Merit

Job Stability Yes No

Organised and Unorganised

Organized sector means, the sector which is working under the strict rules and regulations
laid out by the government, while the unorganized sector is working independently and they
are not under the rules and regulations of the government. The major differences between the
organized and unorganized are given below.

Organised Unorganised
It is registered by the government and
have to follow the rules and regulations It is not registered by the government and
laid down by the government doesnt need to follow the rules and regulations
Enjoys job security No job security
Fixed hours of job No fixed hours
enjoys all the benefit from the
government, pension, pfs does not enjoy any benefit from the govt
Eg: University employees Casual workers, vendors, transport workers

BASIS FOR
ORGANISED SECTOR UNORGANISED SECTOR
COMPARISON
Meaning The sector in which the employment The sector that comprises of small scale
terms are fixed and employees have emterprises or units and are not registered
assured work is Organised sector. with the government.

Governed by Various acts like Factories Act, Bonus Not governed by any act.
Act, PF Act, Minimum Wages Act etc.

Government rules Strictly followed Not followed

Remuneration Regular monthly salary. Daily wages
Job security Yes No
Working hours Fixed Not fixed
Overtime Workers are paid remuneration for No provision for overtime.
overtime.

Salary of workers As prescribed by the government. Less than the salary prescribed by the
government.
Contribution to Yes No
Provident fund by the
employer
Increment in salary Once in a while Rarely
Benefits and perquisites Employees get add-on benefits like Not provided.
medical facilities, pension, leave travel
compensation, etc.

The organized sector consists of the mainly the government employees and they are
enjoying all the privileges and concessions from the government. Some of the private
companies are also involves in the organized because it is registered in the government and
they are working under the rules and regulations laid down by the government. While in the
case of unorganized sector comprises mainly workers from the small scale industries, casual
workers in the construction, trade and transport sectors, and those who are work as street
vendors, head load workers, garment workers, rag pickers etc. Indian agriculture system is
the largest unorgansed sector in India. The people from this sector leading miserable life and
they need protection. People from this sector is getting severe humiliation from the various
side, so government should protect them properly by way of government rules.

Demand, types, and determinants of demand

Demand.

Demand for a commodity means desire backed by wiliness to pay plus ability to pay. That
means simply for having demand for a commodity every person must have two things first
certain type of desire is required for purchasing something plus willingness and ability to pay
for a commodity. More specifically how much quantity of goods, people will purchase at
given price over a certain period of time.

Functions of Demand.

Functions of demand means the relation between various commodities which will be
purchased by consumer at given price and various factors which influence the demand for
commodity when it purchasing. There are many factors which influence the demand for a
commodity in the day to day life.
Demand function can be written as,

Qd=f(P,Y,S,D),

Here
Qd= Quantity demand for a commodity
P= Price of the commodity
Y= Income of the consumer
S= Psychological factors like number of children, place of residence etc
D=Tastes and preferences of consumer

Law of Demand.
Law of demand is the relation between the price and quantity demanded of a commodity,
which means inverse relationship between the price and quantity demanded. When the Price
increases the quantity demand will be decline and when price decrease the quantity demand
will be increase, thus it is simply shows that inverse relationship between the price and
quantity demand for a commodity. This inverse relationship between the price and quantity
demanded will reflect in the negative slope of the demand curve.

Assumptions of Law of Demand.

In order to get the inverse relationship between the price and quantity demanded, it has
certain assumptions like,
- Other determinants of the quantity demanded will be remain constant
- Tastes and preferences of the consumer remain constant
- Income of the consumer remain constant
- Perfect competition in the market
- Prices of other commodities remain constant
- Distribution of income should be equal

Demand Shedule

A demand schedule is a list of price and commodities and this was introduced by Alfred
Marshall and it shows that relation between price and quantity demanded. At each price the
corresponding quantity is the amount of the commodity that would be bought at that price.
Thus demand schedule indicates the quantity consumers want to buy at each price.

The following demand schedule shows an individual demand schedule for a commodity X.

Price of X (Rs) Qty demand of X

7 1
6 2
5 3
4 4
3 5
2 6
1 7

In this table of demand schedule, when price is 7 the quantity demanded would be 1,
and when price is 1, the quantity demanded would be 7, and when price of a commodity is 5
the quantity demanded would be 3, that means when there is high price for a commodity the
quantity demanded purchased by the consumers would be less and then when price of a
commodity is high the quantity demand purchased by consumer would be low. Thus the
demand schedule is the schedule which shows the relationship between the price and quantity
demanded in the table form.

Demand Curve.

Demand curve shows the graphical representation of demand schedule. Price of a

commodity is measured on the vertical axis and quantity demanded on the horizontal axis.
This indicates that quantity demanded increases as the price falls. A normal demand curve
shows that negative relationship between the price and quantity demanded it would be
convex to origin

This is the graphic representation of demand schedule. Here x axis is the quantity demanded
and y axis is the price of the commodity. In the diagram when price of a commodity
increases, the quantity demanded purchases by consumer will decrease and when price
declines the quantity demanded by consumer will be will be increasing. This it shows the
negative relationship between the price and quantity demanded. And the demand curve is
negatively sloped one. In the diagram when the price of a commodity decreasing from P1 to
P2 and P3 and quantity demand purchased by consumer will be increasing from the Q1 to Q2
to Q3.

Why the demand curve slopes Downward.

Income Effect: This means that when the price of commodity falls the real income of the
consumer will be increasing and the consumer will purchase of the commodity because of the
increase in real income of the consumer. This increase the demand for commodity which
derives from the rise in income because of the decline in price is called the income affect.

Substitution Effect: This means that when the price of a commodity falls, it become relatively
cheaper when compared with its substitute goods so the consumer will purchase more the
commodity which is cheaper when compared with its substitute goods.

Diminishing Marginal Utility: Diminishing marginal utility states that marginal utility
derived from the consumption declines as the number of units consumed rises. The consumer
equates marginal utility money with utility derived from an extra unit of consumption. This
consumer will purchase more of a commodity when price falls.

Increase in the number of Consumers: the consumers who are not able to consume the
commodity before the price reduction, starts consume it. Thus demand for a commodity
increases because of an increase in number of consumers.
Increase in Number of Uses: when price of a commodity falls it can be used for the different
purposes. Thus Demand for a commodity also will be increasing when the number of
consumer increases.

The market Demand

Market demand is total demand for commodity by consumers at alternative prices in the
market, per time period. As the number of commodity increases the market demand for a
commodity will be decline.

Market Demand Schedule:

Market demand schedule showing the table which Explains/shows that different prices of
commodities which is purchased by consumers at in the market. For attaining the market
demand schedule one has to add each individual demand for a commodity which is purchased
by consumer at prices in the market. Then we will get the market demand schedule.

Types of Demand.

There are different types of demand, like price demand, income demand, cross demand,
direct demand, derived demand. Let us each explains the each demand in below.

Price Demand.This is shows that relationship between quantity demanded and price of the
commodity purchased by consumer. Other determinants of the commodity are held constant,
the price and quantity demand is inversely related with price. When price of the commodity
increases the quantity demand will be decrease and when price of the commodity decreases
the quantity demand will be increases.
Income demand This is shows that relationship between quantity demanded and income of
the consumer. Other determinants of the commodity are held constant, when income of the
consumer increases, the demand for commodity is also will increase.
Normal goods. Means when income of the consumer increases, the demand for the
commodity also will increase. When income of the consumer decreases the demand for the
commodity also will be decrease
Inferior goods. Means when income of the consumer increases, the demand for the
commodity also will decrease. When income of the consumer decreases the demand for the
commodity also will be increase
Eg: second hand products
Cross demand.It means relationship between the quantity demanded of one commodity and
price of the related commodity. Other determinants of the commodity are held constant.
Related commodities are again divided in two
1. Substitute goods. It means that when increase the price of one goods leads to increase the
demand for another good
Eg: Tea and Coffee
2. Complementary good. . It means that when increase the price of one goods leads to
decrease the demand for another good
Eg: Books and pen, car and petrol
Direct demand Direct demand refers to the demand for final goods. Demand for a goods for
final consumption. The consumer demand for a commodity is the final consumption. That
means in future there is no chance for further transferring of the sale of the product
Derived demand Derived demand means demand for a commodity is derived from the
demand for another commodity. That means demand for factors of production is derived from
the demand of its final product.

Exceptions of Law of Demand.

There are certain goods and services which cannot apply the rules of law of demand, that
means the inverse relationship between the price and quantity demanded. Let us have an
explanation on those commodities

1. Conspicuous consumption. Thorstein Veblen analysed this concept. According to him if

the consumers measure the desirability of a commodity in exclusively by its price, then they
will buy less of a commodity at low price and more at higher price. Such commodities reflect
the desire by some people to impress others with their ability to purchase high priced
commodities..

2.Giffen goods. Robert Giffen observed in 1848 in Ireland where during the famine, when
increase the price of potatoes, there was high demand for the potatos. Potatos where
indispensable food for the Irish peasantry. When the potatos price increases the, peasants
were started to purchase more of the potatos because potatoes are the cheapest source of food.

3. Goods with uncertain product quality. Means that there is misconception that when there is
increase in the price of the goods the quality also will increase.Commanman purchase the
commodities on the basis of the prices of the product. When the price of the commodity
increases they will reduce the demand for it. But there is exceptional some of the higher
income people, they basically consumer the goods on the basis of prices and they think that
when the price of the commodity increases its quality also will increase. In such a case the
demand curve will be upward slopped one rather than downward negatively slope
4. Price rise expectations. Demand for a commodity rises when there is expectation among
the people that in coming future there are chances for increase in the price of good. Suppose
when we take the case of petrol, if government is going to increase the price of the petrol,
people will rush to the petrol pump for purchasing it without considering what the present
price is.

Elasticity of Demand.

Demand means the desire backed with ability to pay and wiliness to pay. The law of
demand means the relationship between the price and quantity demanded, that means inverse
relationship between the price and quantity demanded. And the law of demand does not give
the degree of response of demand to a given change in price. Basically the demand for a
product is determined by the various factors like
- Price of the product
- Consumers income
- Price of the substitutes and complements
- Advertising expenditure by the firms
- Consumers expectation about the future price.
 These are the basic demand determinant factors among the consumers in the
economy, from this price determinant is the most significant factor in the theoretical and
practical point of view. There for we are going to discuss the elasticity of demand.

Price Elasticity of Demand.The price elasticity of demand is defined as the degree of

responsiveness or sensitiveness of demand for a commodity to the change in its price and it is
as measured as the percentage change in quantity demanded divided percentage change in
price.

ep = Percentage change in Quantity demanded

Percentage change in price
Types/Degrees of Price elasticity of Demand

There are five types of elasticity of demand

1. Perfectly elastic demand

2. Perfectly in elastic demand
3. Elastic demand
4. in elastic demand
5. Unitary elastic demand
1. Perfectly inelastic demand. This shows that the relationship between the price and quantity
demanded purchased by the consumer. This concept means whatever the changes happens to
the price of the commodity it will not affect the demand for a product. That means there will
be infinity demand for the commodity without the influence of the price of the commodity.

In the above diagram, X axis is measuring the quantity demand purchased by the consumer
while the Y axis is the price of the commodity. Here one could say that whatever the prices
changes the quantity demand purchased by the consumer will be remain constant. That means
demand for the product will be infinite, no influence of the price of the product from
demanding it.Price elasticity of the demand is zero. 0.

2. Perfectly elastic demand. This shows that the relationship between the price and quantity
demanded purchased by the consumer. This concept means that small changes in the price
leads to the infinite changes in the changes in quantity demanded. Here the demand curve is
horizontal straight line. Thus a small reduction in the price of the commodity will leads to the
infinite changes in the quantity demand for the product.

In the above diagram, X axis is measuring the quantity demand purchased by the consumer
while the Y axis is the price of the commodity. Here when small changes/reduction in the
price of the commodity there will be infinite changes in the quantity demand purchased by
the consumer. That means infinite changes in the quantity demand. The demand curve is
horizontal straight line parallel to xaxis. The price elasticity of demand is the infinite

3. Elastic demand. This shows that the relationship between the price and quantity demanded
purchased by the consumer. This concept means that changes in the quantity demanded
purchased by the consumer is more than that of price changes. That means percentage
changes in the quantity demanded is greater than the percentage changes in the price of the
commodity.
In the above diagram, X axis is measuring the quantity demand purchased by the consumer
while the Y axis is the price of the commodity. when there is changes in price of the
commodity, the quantity demand purchased by the consumer will change more than that of
the price. That means percentage change in quantity demand is greater than the percentage
change in the price. In the table the price has reduced from the P to P1 and quantity demand
increased from the Q to Q1. That means changes in the quantity demand is more than that of
the price. Here price elasticity of the demand for the product is the greater than 1.

4. In-elastic demand. This shows that the relationship between the price and quantity
demanded purchased by the consumer. This concept means that changes in the quantity
demanded purchased by the consumer is less than that of price changes. That means
percentage changes in the quantity demanded is less than the percentage changes in the price
of the commodity.
In the above diagram, X axis is measuring the quantity demand purchased by the consumer
while the Y axis is the price of the commodity. when there is changes in price of the
commodity, the quantity demand purchased by the consumer will change less than that of the
price. That means percentage change in quantity demand is less than the percentage change in
the price. In the table the price has reduced from the P to P1 and quantity demand increased
from the Q to Q1. That means changes in the quantity demand is less than that of the price.
Here price elasticity of the demand for the product is the less than 1.

5. Unitary elastic demand. This shows that the relationship between the price and quantity
demanded purchased by the consumer. This concept means that changes in the quantity
demanded purchased by the consumer is exacly equal to the price changes. That means
percentage changes in the quantity demanded is equal to the the percentage changes in the
price of the commodity.
In the above diagram, X axis is measuring the quantity demand purchased by the consumer
while the Y axis is the price of the commodity. when there is changes in price of the
commodity, the quantity demand purchased by the consumer will change exactly equal to that
of the price. That means percentage change in quantity demand is equal the the percentage
change in the price. In the table the price has reduced from the P to P1 and quantity demand
increased from the Q to Q1. That means changes in the quantity demand is same as that of the
price. Here price elasticity of the demand for the product is the equal to one.
Supply.

Means the amount of product that a firm is able and willing to offer for sale, that means the
quantity of the product which a firm is willing to for sale on particular price on the product.

Supply fuction

The supply function refers to the relationship between the various products that producers are
willing to supply and various determinants of the supply of a commodity. Here the supply
function can be represented as

Qs = f(P,F,S)

Qs = is the quantity of the product which is supplied

P= Price of the product
F= Factors of the product
S= State of technology

Determinants of Supply

1. Production cost:
Since most private companies goal is profit maximization. Higher production cost will lower profit,
thus hinder supply. Factors affecting production cost are: input prices, wage rate, government
regulation and taxes, etc.

2. Technology:
Technological improvements help reduce production cost and increase profit, thus stimulate higher
supply.

3. Number of sellers:
More sellers in the market increase the market supply.

4. Expectation for future prices:

If producers expect future price to be higher, they will try to hold on to their inventories and offer the
products to the buyers in the future, thus they can capture the higher price.

Law of supply

It shows that the relationship between the price of the product and quantity supplied is
expressed as law of supply. It shows the direct relationship between the price of the product
and quantity. When the price increases the quantity supplied by the producer will increase
and price decreases the quantity supplied by the producer will decrease.
 Supply schedule.

It is schedule which shows the relationship between the price of the and quantity supply.
That means at each price how much of the quantity would be supplied by the producer.

Price Supply
10 90
20 100
30 110
40 120
50 130
60 140
70 150

Supply curve

Supply curve is the graphical representation of the supply schedule. This is curve which
shows the direct relation ship between the price and quantity supplied by the producer

The curve shows that the direct relationship between the price and quantity supplied. The
supply curve is the positively slopped one and it shows the upward trend, which means the
direct relationship between the price and the quantity supplied. When the price of the
commodity increases the supply also will increases, when the price of commodity decreases
the prices also will decreases. The supply curve is contradictory to the demand curve which
shows that the indirect/inverse relation between the price and quantity demanded of the
consumer.

Market supply.
It is showing the relationship between the price of the commodities and quantities purchased
by all producers.

Market supply schedule

.
It is the schedule showing the relationship between the price and quantity supplied by the all
producers in the market.

Market supply curve

It is the graphical representation of market supply schedule which shows that relationship
between the price and quantity supplied all producers in the market.

Price Elasticity of Supply

Different producers respond differently to a given change in the price of a commodity. Elasticity of
supply explains reactions of producers to a particular change in price

There are five types of elasticity of supply:

(1) Perfectly Elastic (Es =):
Supply of a commodity is said to be perfectly elastic, when the supply changes to any extent
irrespective of any change in its price. It means that at a price, any quantity of the good can be
supplied. But, at a slightly lower price, the firm will not sell at all. It is purely an imaginary concept
and can only be explained with the help of an imaginary supply schedule.

In this case, the elasticity of supply is infinity and the supply curve is a straight line parallel to the X-
axis as shown in Fig. 3.8. Price remains OP irrespective of changes in supply. In this case, a small rise
in price evokes an indefinitely large increase in the amount supplied. Further, a small drop in price
would reduce the quantity, producers are willing to supply to zero.
(2) Perfectly Inelastic (Es=0):
Supply for a commodity is perfectly inelastic, if supply remains same irrespective of change in price
of the commodity. A perfectly inelastic supply curve is a straight line parallel to the Y- axis as shown
in Fig. 3.9. It is clear from the figure that in this case, supply will not increase at all how so ever much
price may rise.

The producers dump the produced quantity of a commodity for whatever it would bring. Here, the
price of the commodity depends upon the demand of the commodity. The higher the demand, the
higher will be the price.

(3) Unit Elastic (Es =1):

Supply of a commodity is said to be unit elastic, if the percentage change in quantity supplied is equal
to the percentage change in price. Any straight line supply curve passing through the origin has an
elasticity of supply equal to unity (Fig. 3.10) irrespective of the slope of this straight line and the
scales of the two axis. But, it is important to realize that unitary elasticity of supply unlike unitary
elasticity of demand, has no special economic significance.
(4) More than Unit Elastic (E s> 1):
When the percentage change in quantity supplied exceeds the percentage change in price, supply of
the commodity is said to be elastic or more than unit elastic (Fig. 3.11). This type of supply curve
passes through the price (Y) axis.

(5) Less than Unit Elastic (Es < 1):

When the percentage change in quantity supplied is less than the percentage change in price, supply of
the commodity is said to be inelastic or less than unit elastic (Fig. 3.12). This type of supply curve
passes through the quantity (X) axis.
Equilibrium.

A market is in equilibrium when the quantity demand equal to quantity supplied. In

competitive market equilibrium attain when the forces of demand and supplies intersect to
determine the price. The price at which quantity demand equals the quantity supply is called
the equilibrium price.
In the above diagram, dd is the demand curve and ss is the supply curve. X axis measuring
the quantity demanded and y axis measuring the price of the commodity. Here the market is
equilibirum when the demand for the quantity demanded is equal to the supply of the
commodity. Here P is the comepetitive price and Q is the competitive demand for
commodity. So the equilibirum level reachded in the market where demand=supply where
equilibrium price is equal to the equilibrium quantity demand. Suppose when the price
increases above the competitive price will leads to the excess supply and will lose some of
the customers and sellers may forced to reduce the price to the competitve price. Suppose
when the price of commodity decreased from the competitive price, then that will leads to
excess demand, and increases the demand will force the sellers to rise the price of the
commodity till the competitive price.
Pricing Methods:

A business can use a variety of pricing strategies when selling a product or service. The Price
can be set to maximize profitability for each unit sold or from the market overall. It can be
used to defend an existing market from new entrants, to increase market share within a
market or to enter a new market. Businesses may benefit from lowering or raising prices,
depending on the needs and behaviors of customers and clients in the particular market.
Finding the right pricing strategy is an important element in running a successful business.

Creaming or skimming

It is price strategy in which sellers will fix the higher price for the initial stages of the selling
then lowers the price of the product or service over time. It is the temporary version of price
discrimination/yield management. It allows the firms to recover the sunk cost before the starts
of high competition and lowers the market price

Commonly used in electronic markets when a new range, such as DVD players, are firstly
dispatched into the market at a high price. This strategy is employed only for a limited
duration to recover most of the investment made to build the product.

Penetration pricing

Penetration pricing includes setting the price low with the goals of attracting customers and
gaining market share. The price will be raised later once this market share is gained. This
strategy works on the expectation that consumers will switch to new brad because of the
lower price.

Cost Plus pricing/Mark up pricing

It is used to maximize the rate of return of companies. Here the firm add a percentage to costs
as profit margin to come to their final pricing decisions. Here firm may achieve profit
maximization by increasing their production until their MR equals the MC and charging the
price determined by the demand curve. For example it may cost 100 to produce a widget
and the firm add 20% as a profit margin so the selling price would be 120.00

Marginal-cost pricing

In business, the practice of setting the price of a product to equal the extra cost of producing
an extra unit of output. By this policy, a producer charges, for each product unit sold, only the
addition to total cost resulting from materials and direct labor. Businesses often set prices
close to marginal cost during periods of poor sales. If, for example, an item has a marginal
cost of $1.00 and a normal selling price is $2.00, the firm selling the item might wish to
lower the price to $1.10 if demand has waned.

Premium pricing

Premium pricing is the practice of keeping the price of a product or service artificially high in
order to encourage favourable perceptions among buyers, based solely on the price. The
practice is intended to exploit the (not necessarily justifiable) tendency for buyers to assume
that expensive items enjoy an exceptional reputation, are more reliable or desirable, or
represent exceptional quality and distinction.

Administered Price, The price of a good or service as dictated by a governmental or other

governing agency. Administered prices are not determined by regular market forces of supply
and demand. Examples of administered prices included price controls and rent controls.

Psychological pricing, Pricing designed to have a positive psychological impact. For

example, selling a product at $3.95 or $3.99, rather than $4.00. There are certain price points
where people are willing to buy a product. If the price of a product is $100 and the company
prices it as $99, then it is called psychological pricing.

Bundle Pricing, The act of placing several products or services together in a single package
and selling for a lower price than would be charged if the items were sold separately. The
package usually includes one big ticket product and at least one complementary good.
Bundled pricing is a marketingmethod used by retailers to sellproducts in highsupply.