R
 

R
R


TR = P×Q
AR = TR/Q = P×Q/Q = P
MR = ƲR/ƲQ
MR=ƲR/ƲQ=P×ƲQ/ƲQ+Q×ƲP/ƲQ=P+Q × ƲP/ƲQ
MR = P [1+Q/P × ƲP/ƲQ]
elasticity defined as ep = P/Q × ƲQ/ƲP
Substituting the value of ep in equation
MR = P [1+Q/P× ƲP/ƲQ]
MR= P [1-1/ep]
Since 1/ep =1/ƲQ/ƲP×P/Q
AR = P
MR = AR- AR/ep

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 ÿ
   ÿ
ÿlose economy
ƥ Economy is self sufficient
ƥ No economic connection with the world
ƥ No Transmission of business cycles
Open economy
ƥ Economy with economic connection the world
ƥ Bound to be affected by changes in other
economies
ƥ Transmission of business cycles

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ÿRÿ
R
 ÿ
  ÿ

|
 


   
 ÿRÿ
R
 ÿ
 
ÿ
ƥ Y= ÿ+S
ƥ In equilibrium
ƥ S=I
ƥ Y= ÿ+I
ƥ Y= ÿ+I+G

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ÿRÿ
R
  
ÿ

|
 


   
 ÿRÿ
R
  
ÿ
ƥ Y= ÿ+I +G+(X-M)
ƥ I+G+X injections to flow of income
ƥ S+T+M leakages from flow of income

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 
  

efinition
ƥ emand refers to willingness supported by
ability to buy a commodity
ƥ Types
ƥ Individual emand
ƥ Market emand
ƥ irect emand -- consumer goods
ƥ erived emand ƛ capital goods & labour

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  ÿ


Table displaying various quantities demanded at various prices of a
commodity

price Quantity demanded

10 20
12 18
14 16
16 14
18 12
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   |
 ÿ R
ƥ emand curve is a graphical
representation of demand schedule
ƥ It displays various quantities demanded at
various prices
ƥ It expresses inverse relationship between
price & quantity demanded
ƥ emand curve slopes downward from left
to right i.e. negative slope

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  
ƥ ƠOther things remaining same quantity
demanded is inversely related to the price
of a commodityơ
ƥ Law of demand is based on the principle
of 0
  
    i.e. as
we consume more of a good the utility or
satisfaction derived from additional unit of
consumption diminishes

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RÿR 

ÿ 
ƥ Income & wealth of the consumer
ƥ ÿhanges in tastes & preferences
ƥ Expectations about future price changes
ƥ Population
ƥ Seasonal changes
ƥ Price of substitute & complementary
goods

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ÿ
  
  
ƥ When demand changes due to change in
price it is called Expansion & contraction of
demand
ƥ demand increases due to fall in price
ƥ demand decreases due to rise in price
ƥ Movement along the demand curve
ƥ Here the law of demand holds good

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ÿR   
Shifts in demand curve
When demand increases due to influence
of other factors on demand i.e. increase in
income & wealth, price of related goods,
changes in tastes & preferences
expectations about future price changes,
population, seasonal changes etc. demand
curve shifts either to right

|
 


  

ÿR   
Price Old demand New demand
schedule schedule
10 20 30

12 18 25

14 16 22

16 14 20

18 12 15
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 ÿR   
Shifts in demand curve
ƥ When demand decreases due to changes
in other factors influencing demand i.e.
income & wealth, price of related goods,
changes in tastes & preferences
expectations about future price changes,
population, seasonal changes etc. demand
curve shifts either to left

|
 


  

 
0
 
ƥ emand function expresses the relation
between demand & price, it is linear
function e.g. Q = a+bp
a = quantity demanded when price is zero
b = price co-efficient
p = price
Q = quantity demanded
Q = a + bp
|
 


  


 ÿ 
ƥ The degree of responsiveness of demand
to a change in price is called as `


0
0
ƥ It quantifies the extent of change in
demand due to change in price

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 Rÿ 
 ÿ
ƥ Perfectly elastic demand
ƥ Perfectly inelastic demand
ƥ Unitary elastic demand
ƥ Relatively elastic demand
ƥ Relatively in elastic demand

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|
  R 
 ÿ
ep = % change in quantity demanded/% change
in price
% change in quantity demanded =
change in quantity demanded × 100
original quantity demand
% change in price = change in price × 100
original price
= change in quantity demanded / change in price
original quantity demand original price

|
 


  


 ÿÿ
ÿ

Point elasticity
ep = ±Q/±P ×P/Q
ep = Q2- Q1/P2-P1 × P1/Q1

Arc elasticity (over a segment of  curve)

ep = Q1-Q0/P1- P0 × (P0+ P1)/2 ÷ (Q0+Q1)/2
ep = ±Q/±P × P0+ P1/Q0+Q1

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ÿ
  R
R
 
Substitutes
ƥ If more of commodity X is purchased when price
of Y increases X & Y are substitutes
ÿomplements
ƥ If less of commodity X is purchased when price
of Y increases X & Y are complementary goods
ƥ emand for such goods is influenced by the
price of related good

|
 


   

ÿR 
 ÿ
 
ƥ ÿross elasticity of demand is defined as
other things remaining same the %
change in the quantity demanded of a
good due to change in the price of
another good
ƥ ecij= ƲQi/Qi × 100 = ƲQi/ ƲPj ×Pj/Qi
ƲPj/Pj × 100

|
 


   
 ÿR 
 ÿ
 
ƥ Positive cross elasticity--- substitutes
ƥ Negative cross elasticity--- complementary
ƥ Zero cross elasticity--- no relation

|
 


   
ÿ 
 ÿ
 
ƥ Income elasticity of demand is defined as
rate of change in quantity demanded of a
good due to change in the income of the
consumer
ƥ Q = f(Y)
ƥ ey = ƲQ/Q È ƲY/Y
ƥ ey = ƲQ/ƲJY/Q

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 ÿ 
 ÿ
 
ƥ Positive income elasticity --- normal
goods

ƥ Negative income elasticity --- inferior

goods

|
 


   
 RR
ƥ emand for certain goods decline when
the price of them fall & vice versa these
are called as inferior goods/ Giffen goods
ƥ Income elasticity of demand for   
    goods is negative i.e.
ey<0
ƥ emand curve bends backward or
downward

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ÿR 
ÿ

 ÿ 
ƥ Nature of good
ƥ ÿloseness of substitutes
ƥ Proportion of income of income spent
ƥ Time lapsed from price change
ƥ Initial level of income of an economy

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R

 ÿ
 
ƥ Promotional or advertising elasticity of
demand
ƥ Relation between advertising expenditure
& quantity demanded
ƥ Measures change in demand due to
change in advertising expenditure

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   |
R  
TR = P×Q
AR = TR/Q = P×Q/Q = P
MR = ƲR/ƲQ
ƥ TR will increase if ed is relatively elastic &
price is reduced
ƥ TR will decrease if ed is relatively inelastic
& price is reduced
ƥ To maximize revenue P should be = to the
point where ed becomes inelastic

|
 


   
 

 
ƥ Supply-- Quantity of commodity offered
for sale

ƥ supply & price Positively related

ƥ Supply different from stock

|
 


   
 
 ÿ


ƥ Table showing various quantities supplied
at various prices

Price Quantity supplied

12 20
15 25
18 30
21 37

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ÿ R
ƥ Supply curve is a graphical representation
of supply schedule
y
p S
r
i
c
e
x
0
Q ss

|
 


   

  

ƥ ƠOther things remaining same the quantity
supplied is directly related to price of the
commodityơ
ƥ Supply positively related to price
ƥ Supply curve rises upward

|
 


   
ÿR 
ÿ


ƥ Prices of other goods
ƥ Prices & availability of factors of
production
ƥ State of technology
ƥ Improvement of means of transport &
communication
ƥ Market structure
ƥ Government policy etc.
|
 


   
ÿ
  

 
ƥ When supply changes due to change in
price, it is called Expansion & contraction
of supply
ƥ supply increases due to rise in price
ƥ supply decreases due to fall in price
ƥ Movement along the supply curve
ƥ Here the law of supply holds good

|
 


   
ÿR   

Shifts of supply curve
ƥ When supply increases due to influence of other
factors Prices of other goods
ƥ Prices & availability of factors of production
ƥ State of technology
ƥ Improvement of means of transport &
communication
ƥ Market structure
ƥ Government policy etc
ƥ Supply curve shifts to the right

|
 


   
 ÿR   

Shifts of supply curve
When supply decreases due to influence of other
factors such as
ƥ Prices & availability of factors of production
ƥ State of technology
ƥ Improvement of means of transport &
communication
ƥ Market structure
ƥ Government policy etc
ƥ supply curve shifts to the left
|
 


   

 ÿ 

ƥ The degree of responsiveness of
supply to a change in price is called
as `
 
supply
ƥ It measures the extent of change in
supply due to change in price

|
 


   |
  R  
 ÿ


ƥ Elasticity supply= % ÿhange in Q S/ %ƲP

ƥ ES=ƲQ/ƲP × P/Q

ƥ ES=(Q2-Q1/P2-P1) (P1+P2/Q1+Q2)

|
 


   
 
 ÿ


ƥ Relatively elastic supply ES >1
ƥ Relatively inelastic supply ES<1
ƥ Perfectly elastic supply ES=ƺ
ƥ Perfectly inelastic supply ES=0
ƥ Unitary elastic supply ES=1
ƥ ES curves

|
 


   
R  ÿ
 
PRIÿE ETERMINATION
ƥ Assumption of perfect competition
ƥ Immediate adjustment
ƥ Price is determined by the opposite forces
of demand &supply
ƥ The point of intersection of demand &
supply determines price

|
 


   

  
R Rÿ 
  R
Price Q Q S Market status Price ±

50 80 160 surplus decline

40 100 140 surplus decline
30 120 120 Equilibrium stable
20 140 60 deficit increase
10 180 20 deficit increase

|
 


   
Rÿ ±

ƥ INÿREASE IN EMAN
S

P1
P

1


0
Q &S

|
 


   
Rÿ ±
ƥ EQUAL SHIFTS IN SUPPLY &EMAN
P
S
S1

P E1
E
1

0
Q&S

|
 


   
  Rÿ ±
ƥ Price increases due to tax
ƥ The extent of price increase depends
on E & ES
ƥ The burden of tax on buyer/supplier
or shared by both

|
 


   

 ÿ 
 R 
ƥ E = 0 Entire tax burden on buyer

ƥ E = ƺ Entire tax burden on supplier

ƥ E > 1 Less tax burden on buyer

ƥ E < 1 Less tax burden on supplier

|
 


   

 ÿ 

 R 
ƥ ES = 0 Entire tax burden on supplier

ƥ ES = ƺ Entire tax burden on buyer

ƥ ES<E Greater tax burden on supplier

ƥ ES>E Greater tax burden on buyer

|
 


   
ÿR

Rÿ 
ƥ Price ceilings result in shortages
ƥ Price floors result in surplus
ƥ ÿentrally planned economies face surplus
& shortages
ƥ Minimum wages cause surplus labour

|
 


   |
ÿ  R
 R
ƥ ÿonsumer is a king -- buying power,
preferences & price signals
ƥ Preference & choice
ƥ Objectives
ƥ To derive maximum utility
ƥ To pay lowest possible price

|
 


   
 

 
ƥ Utility ƛ capacity of commodity to satisfy
human want

ƥ ÿardinal approach -- measurability of

utility

ƥ Ordinal approach ƛ Ranking of utility

|
 


   
 

 
Good ÿardinal Ordinal
A1 20 2
A2 22 1
A3 18 3
A4 15 4

|
 


   

R
  

R
 

ƥ Marginal utility is addition to total utility
ƥ Total utility increases with every addition
at diminishing rate
ƥ Marginal utility diminishes with every
additional unit consumed
ƥ When total utility is maximum  
    
ƥ Total utility diminishes when  
     
|
 


   
ƥ EQUI-MARGINAL UTILITY
ANALYSIS

|
 


   
 R ÿ ÿ R

|