Marshal Defined Economics as:

“A study of mankind in the ordinary business of life, it examines that part of individual and
social action which is most closely connected with the attainment and with the use of material
requisties of wellbeing.Thus it is on one side a study of wealth and on the other side and more
important side a part of the study of man.”

Resources:

Land, Labour, Capital and Organization.

Land:

all free gifts of the nature. For example. Oil, Gass, Fishes, Water, Dew and Air etc.

Capital:

Made by human hands.

Human Capital:

(Educated Persons) Services provided by human

Physical Capital:

table, fan and building etc are physical capital.

Labour :

Execute the plan of top management

Organization:

is an combines that input all (land, labour, human , capital) and convert it into final output.

Positive statement:

Claims that attempt to describe the world as it is.For example Sun rises,
Normative Statement:

Claims that attempt to describe how the world should be. For example, Student could not come
in jeans.

Imperical Study:

Deficit:

The amount by which a governmnet, company or individual`s spending exceeds its income over
a period of time.

Surplus:

Being more than or in excess of what is needed or required an amount of quantity in excess of
what is needed.

Trade off:

To gain something to sacrifices another.

Inflation:

Rise in the prices

Stagflation :

Both are measuring together (unemployment increases and inflation increases)

Efficiency:

To get maximum output from limited resources.

Equity: Distribution of all economic agents equally.

Opportunity Cost:

Cost of a product is a amount of second product that a person/firm/ nation sacrifices in order to
attain an additional unit of first product, is called opportuinty cost.
It can be:

Increasing opportunity cost, Constant opportunity cost, Decreasing opportuinty cost.

In economics, a production-possibility frontier (PPF), sometimes called a production-possibility

curve or product transformation curve, is a graph that shows the different rates of production of
two goods and/or services that an economy can produce efficiently during a specified period of
time with a limited quantity of productive resources, or factors of production. The PPF shows the
maximum amount of one commodity that can be obtained for any specified production level of
the other commodity (or composite of all other commodities), given the society's technology and
the amount of factors of production available.

A PPF shows all possible combinations of two goods that can be produced simultaneously during
a given period of time, ceteris paribus. Commonly, it takes the form of the curve on the right.
For an economy to increase the quantity of one good produced, production of the other good
must be sacrificed. Here, butter production must be sacrificed in order to produce more guns.
PPFs represent how much of the latter must be sacrificed for a given increase in production of
the former.
The Market Forces of Supply and Demand

Determinants of Supply& Demand

Price (P) +ve

Cost of production (C) –ve

Technology (Tech) +ve

Technique of production (TP) +ve

R&D +ve

Education and Training of the input (E&T)

Taxes (T) –ve

Gov. Expenditure on Infrastructure

Expectations (E) –ve

Weather conditions (W)

Natural Disasters (ND) –ve

Law & Orders (LO) +ve

Political instability (PI)

Health Facility (HF) +ve

Number of Firms (NF) +ve

Supply Function

Supply depend on the following factor

Qs = f (p,c,tec,Tp,R&D,E&T,T,Ei,E,W,LO,HF,NF,Nd,Pi)

Price Factors

Price (P)

Non Price Factors

Other than price all the rest factors are non-price factor.
 Movement along Supply Curve

It will take place if all the Non-price Factor remains unchanged and only price factor change
such as

P
S
A
P1

B
P

Q Q2 Q

Shifting of the supply curve

It will take place if the price factor remains unchanged and all non-rice factors change.

Increase in Supply Decrease in Supply

S1 S2
P P
S2 S1

Q Q
 Movement along Demand Curve

It will take place if all the Non-price Factor remains unchanged and only price factor change
such as
P D S2
S1

P1D B
P
P1 P D S2
S1
A
P
D
P1
Q1 Q Q
P

D
D
Q1 Q
Q Q1 Q Q
Shifting of the Demand curve

It will take place if the price factor remains unchanged and all non-rice factors change.

Increase in Demand Decrease in Demand

D1
D
P P
D D1

D1
D

Q
Equilibrium

It will take place a point where both supply curve and demand curve intersect each other such as

P D S
D

P D1

P
P

P1
S
D

Q Q
Case No 1 S

When price factor change equilibrium is also change Q Q1

When price goes up Quantity demanded goes down and this called Surplus / excess supply

When price decrease Quantity demanded Increases and this call Deficit / Excess demand/
Shortage

P
Surplus S
D
B A
P1

P2
Shortage

S
D

Q1 Q Q2 Q
 Case No2

When non price Factor of demand change

Increase in Demand Decrease in Demand

Case No 3

When non price factor of supply change

Increase in Supply Decrease in Supply

D S1 D S1
P P
S2 S2

P P
P1 P1

D D

Q Q1 Q Q1 Q Q
 P D S2
S1

Elasticity of Demand
P1
Definition
P
P D S2
Elasticity is a measure of how much buyers and sellers respond to changes in market
S1
conditions

Type of Elasticity D
P1
Price Elasticity Q1 Q Q
P
Price elasticity of demand is the percentage change in quantity demanded given a percent
change in the price.

The price elasticity of demand is computed as the percentage change in the quantity demanded
D
divided by the percentage change in price.
Q1 Q Q
Percentage change in quatity demanded
Price elasticity of demand=
Percentage change in price
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you
buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:

(10−8 )
×100
10 20 percent
= =2
(2 . 20−2 . 00) 10 percent
×100
2. 00

Determinants of Price Elasticity of Demand

 Necessities versus Luxuries

 Availability of Close Substitutes
 Definition of the Market
 Time Horizon
Ranges of Elasticity

Inelastic Demand

 Percentage change in price is greater than percentage change in quantity demand.

 Price elasticity of demand is less than one.

P D

P1

Q Q1 Q

Elastic Demand

 Percentage change in quantity demand is greater than percentage change in price.

 Price elasticity of demand is greater than one.

P D

P1

Q Q1 Q
Perfectly Inelastic Demand

 Price elasticity of demand is Equal to 0

P1

Q Q

Perfectly Elastic Demand

 Price elasticity of demand is Equal to Infinity

P D

Q Q1 Q
Cross Price Elasticity

Elasticity measure that looks at the impact a change in the price of one good has on the
demand of another good.

Percentage change in quatity demanded Good A

Cross Price elasticity of demand=
Percentage change in price of Good B

 % change in demand Q1/% change in price of Q2.

 Positive-Substitutes
 Negative-Complements.

Income Elasticity

Income elasticity of demand measures how much the quantity demanded of a good
responds to a change in consumers’ income. It is computed as the percentage change in the
quantity demanded divided by the percentage change in income.

Percentage change in quatity demanded

Income elasticity of demand 
Percentage change in Income

Types of Goods

Normal Goods
o Income Elasticity is positive.
Inferior Goods
o Income Elasticity is negative.
Higher incomeraises the quantity demanded fornormal goodsbut lowers the quantity
demanded forinferior goods.

The Production Function and the Costs of Production

a production function is a function that specifies the output of a firm, an industry, or an

entire economy for all combinations of inputs. This function is an assumed technological
relationship, based on the current state of engineering knowledge; it does not represent
the result of economic choices, but rather is an externally given entity that influences
economic decision-making. Almost all economic theories presuppose a production
function, either on the firm level or the aggregate level. In this sense, the production
function is one of the key concepts of mainstream neoclassical theories. Some non-
mainstream economists, however, reject the very concept of an aggregate production
function.
In micro-economics, a production function is a function that specifies the output of a
firm for all combinations of inputs.

Production function as a graph:

Any of these equations can be plotted on a graph. A typical (quadratic) production

function is shown in the following diagram under the assumption of a single variable
input (or fixed ratios of inputs so the can be treated as a single variable). All points above
the production function are unobtainable with current technology, all points below are
technically feasible, and all points on the function show the maximum quantity of output
obtainable at the specified level of usage of the input. From the origin, through points A,
B, and C, the production function is rising, indicating that as additional units of inputs are
used, the quantity of output also increases. Beyond point C, the employment of additional
units of inputs produces no additional output (in fact, total output starts to decline); the
variable input is being used too intensively. With too much variable input use relative to
the available fixed inputs, the company is experiencing negative marginal returns to
variable inputs, and diminishing total returns. In the diagram this is illustrated by the
negative marginal physical product curve (MPP) beyond point Z, and the declining
production function beyond point C.

From the origin to point A, the firm is experiencing increasing returns to variable inputs:
As additional inputs are employed, output increases at an increasing rate. Both marginal
physical product (MPP, the derivative of the production function) and average physical
product (APP, the ratio of output to the variable input) are rising. The inflection point A
defines the point beyond which there are diminishing marginal returns, as can be seen
from the declining MPP curve beyond point X. From point A to point C, the firm is
experiencing positive but decreasing marginal returns to the variable input. As additional
units of the input are employed, output increases but at a decreasing rate. Point B is the
point beyond which there are diminishing average returns, as shown by the declining
slope of the average physical product curve (APP) beyond point Y. Point B is just tangent
to the steepest ray from the origin hence the average physical product is at a maximum.
Beyond point B, mathematical necessity requires that the marginal curve must be below
the average curve (See production theory basics for further explanation.