Department of Statistics © _ Jahangirnagar University abt, BASIC ECONOMICS STAT-107 >Contents introduction... Economics... Principle of Economics Macroeconomics and Microeconomics First Model: Circular Flow Diagram... Second Model: The Production Possibilities Frontier .. The Market Force of Supply and Demand . Demand., Supply Supply and Demand Together. Equilibrium Curve Utility and Demand... Utility Total Utility Marginal Utility The law of diminishing marginal utility. Maximizing Utility . Relation between Total Utility and Marginal Utilit ‘The Budget Constraint Marginal decision rule Indifference curve Four Properties of Indifference Curves. Output and Cost, Total Revenue., Total Cost Opportunity Cos The Production Function. The Various Measures of Cost Page| OP eta Megur - Sut 19Relationship between Marginal Cost and Average ‘Total Cost. ‘The Relationship between Short-Run and Long-Run Average Total Cost . Market Economy Competitive Market. The Revenue of a Competitive Firm.... Profit Maximization and the Competi e Tirm’s Supply Curve ‘The Firm's Short-Run Decision to Shut Down .... Imperfect Competition... Break-even Point of Production Shut-down Point of Production... Efficiency . Economy pricing. Price Discrimination ... SDP, GNP and GN The Components of GDP. Gross National product (GNP).. Net National Product (NNP).... Nominal GDP .. Real GDP... GDP Deflator. Inflation and Deflation... Defilation of Inflation, Different types of inflation ... Effects of Inflation. Consumer price index (CPI)..... Phillips Curve. The long-run Phillip curve. The Short-run Phillip curve Monetary and fiscal Policy.n sone ST Page 12 OP eta Megur - Sut 19Money ‘The Functions of Money. The Kinds of Money... Tools of monetary policy Difference between monetary and fiscal policy. ‘Types of taxes (ncome Distribution Distribution of income... Income Share of Households in Quintiles .. Measurement of Inequality Income Inequality. The Income Lorenz Curve The Gini Coefficient... The Sources of Economic Inequality... Page 13 OP eta Megur - Sut 19Introduction Economics: Economies is the study of how society manages its scarce resources, Here scarcity means that society has limited resources but unlimited wants, needs and therefore cannot produce all the goods and services people wish to have. For instance, a society faces many decisions: A society must decide what jobs will be done and who will do them OD Itneed some people to grow food, other people to make clothing ete. U Society involves people to land, buildings, and machines etc. It is also the study of choices. It is impossible to satisfy all of needs simultaneously, so society must take decisions to allocate resources according to people choices. Principle of Economics Ten principles of economics ‘+1. People face tradeoffs * 5. Trade can make '* 8. Acountry’s standard +2 The cost of everyone better off of living depends on its something is what you +6. Markets are usually a ability to produce give up to get it good way to organize goods and services = 3. Rational people economic activity #9. Prices rise when the think at the margin = 7. Governments can govt. prints too much © 4. People respond to sometimes improve money incentives market outcomes '* 10. Society faces a between inflation and unemployment How People Make Decision (Principle one to four) - 1. People face tradeoffs: There is no such thing as a free lunch.” To get one thing that we like, ‘we usually have to give up another thing that we like, Making decisions requires trading off Page la | ee(a balance achieved between two desirable but incompatible features) one goal against another. (Tradeoffs meaning balance create in money or time, Like, two things choices in market, but can’t effort on both. So, should have one select and one give up.) > Efficiency the property of society getting the most it can from its scarce resources > Equity the property of distributing economic prosperity fairly among the members of society Example:- “A student who must decide how to allocate her most valuable resource such as time. For every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part time job for some extra spending money. * Parents deciding how to spend their family income. They can buy food, clothing, ora family vacation. Or they can save some of the family income for retirement or the children’s college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good. * The classic trade-off is between “guns and butter.” The more we spend on national defense (guns) to protect our shores from foreign aggressors, the less we can spend on consumer goods (butter)to raise our standard of living at home. + The modem society is the tradeoff between a clean environment and a high level of income. Thus, while pollution regulations give us the benefit of a cleaner environment and the improved health that comes with it, they have the cost of reducing the incomes of the firm’s owners, workers, and customers. + Another tradeoff society faces is between efficiency and equity. Efficiency means that society is getting the maximum benefits from its scarce resources. Equity means that those benefits are distributed fairly among society’s members. * Policies aimed at achieving a more equal distribution of economic well-being. Although these policies have the benefit of achieving greater equity, they have a cost in terms of reduced efficiency. When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller. 2. The Cost of Something Is What You Give Up to Get It: As people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of action. Here cost ‘means opportunity cost which says that whatever must be given up to obtain some item. > Opportunity Cost whatever must be given up to obtain some item Example: * College athletes who can earn millions if they drop out of school and play professional sports. So the opportunity cost of college is to drop out from college which is very high, ‘ When students spend a year listening to lectures, reading textbooks, and writing papers, they cannot spend that time working at a job. For most students, the wages given up to attend school are the largest opportunity cost of their education. Page IS OP eta Megur - Sut 193. Rational People Think at the Margin: Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have. Marginal changes describe small incremental adjustments to an existing plan of action that means decisions are not extreme points but marginal changes. > Rational People people who systematically and purposefully do the best they can to achieve their objectives > Marginal Changes small incremental adjustments to a plan of action Example:- + For instance, suppose that flying a 200-seat plane costs the airline $100,000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500. In fact, however, the airline can raise its profits by thinking at the margin. Imagine that a plane is about to take off with ten empty scats, and a standby passenger waiting at the gate will pay $300 for a seat. Should the airline sell the ticket? Of course it should. If the plane has empty seats, the cost of adding one more passenger is minuscule Although the average cost of flying a passenger is $500, the marginal cost is merely the cost of the bag of peanuts and can of soda that the extra passenger will consume. As long as the standby passenger pays more than the marginal cost, selling the ticket is profitable. 4. People Respond to Incentives: An incentive is something (such as the prospect of a punishment or a reward) that induces a person to act. Because rational people make decisions by comparing costs and benefits, their behavior may change when the costs or benefit change. That is, they respond to incentives. > Incentive something that induces a person to act Example:- + When the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher. So, the effect of a good’s price on the behavior of buyers and sellers in a market—in this case, the market for apples— is crucial for understanding how the economy allocates scarce resources. “Many public policies change the costs or benefits that people face and, therefore, alter their behavior. A gasoline tax also encourages people to take public transportation rather than drive and to live closer to where they work. If the tax were larger, more people would be driving hybrid cars, and if it wer to electric cars. large enough, they would switch * How does a seat belt law affect auto safety? When a person wears a seat belt, the probability of surviving a major auto accident rises. Driving slowly and carefully is costly because it uses the driver’s time and energy. When deciding how safely to drive, rational people compare the marginal benefit from safer driving to the marginal Page 16 OP eta Megur - Sut 19cost. They high. % According to Peltzman’s evidence, these laws produce both fewer deaths per accident and more accidents. He concluded that the net result is little change in the number of driver deaths and an increase in the number of pedestrian deaths. Peltzman’s analysis of auto safety is an offbeat example of the general principle that people respond to incentives. When analyzing any policy, we must consider not only the direct effects but also the indirect and sometimes less obvious effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior. e more slowly and carefully when the benefit of increased safety is How people interact with one another (Principle five to seven) 5. Trade can make everyone better off: Trade allows each person to specialize in the activities he or she does best whether it is farming, sewing , or home , building. By trading with others, people can buy a greater variety of goods and services at lower cost. Countries as well as families benefit from the ability to trade with one another. Example: ‘© The Japanese are our competitors in the world economy. In some ways, this is true because American and Japanese firms produce many of the same goods. Ford and Toyota compete for the same customers in the market for automobiles. Apple and Sony compete for the same customers in the market for digital music players 6. Markets are usually a good way to organize economic activity: Communist countries central planners are in the best position to determine the allocation of scarce resources in the economy. These central planners decided- What goods and services were produced + How much was produces * And who produced and consumed these goods and services > Market Economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services Example:- + In any market, buyers look at the price when determining how much to demand, and sellers look at the price when deciding how much to supply. As a result of the decisions that buyers and sellers make, market prices reflect both the value of a good to society and the cost to society of making the good. Smith’s great insight was that prices adjust to guide these individual buyers and sellers to reach outcomes that, in many cases, maximize the welfare of society as a whole 7. Governments can sometimes improve market outcomes: We need government - Enforce rules and maintain institutions that are key to market economy - Need institutions to inforce property rights > Property rights the ability of an individual to own and exercise control over scarce resources courts, police etc, - Promote efficiency and avoid market failure. Pagel? OP eta Megur - Sut 19> Market failure a situation in which a market left on its own fails to allocate resources efficiently > Externlity the impact of one person’s actions on the wellbeing of a bystander > Market power the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices How the economy as a whole works (Principle ight to ten) - 8. A country’s standard of living depends on its ability to produce goods and services: There is a large variation in living standard across countries and overtime which reflected in living standard across countries and overtime which reflected in various measures of the quality of time. > Productivity the quantity of goods and services produced from each hour of a worker's time Example:- + Citizens of high income countries have TV sets, more cars, nutrition, healeare and a larger life expectancy than citizes of low income countries. 9. Prices rise when the govt. prints too much money: When government of a country prints too much money then inflation arises President Gerpaid Ford called inflation. “Public enemy number one”, it is one of the economic problem. > Inflation an increase in the overall level of prices in the economy Example:- ‘ In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than 2 years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts. This episode is one of history's most spectacular examples of inflation, an increase in the overall level of prices in the economy. 10. Society faces a short-run tradeoff between inflation and unemployment: Most economist describe the short-run (1-2 year) effects of monetary injection as follows- ‘ Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services ‘Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and services More hiring means lower unemployment Business cycle fluctuations in economic activity, such as employment and production ve Page 18 OP eta Megur - Sut 19Macroeconomics and Microeconomics Macroeconomics First Model: ircular Flow Diagram Household Owners of Firms property or ‘consumer sector or family Production or Bussiness sector page 19 te Mger ~ Sut 99 So1WOUOIBOJ9I\)Household Known as flow of ‘ners of propery ‘orconsumer Sector inputs and flow or faily seemmne of Outputs oF real Bussiness sector flow or exchange flow Household Firms (Owners of propery ‘or consumer Sector cor faily Production ar Bussuness = The combination of figure-02 and figure-03 is called simple circular flow diagram = If we consider this situation in the marketplace then market flow for input situation is called market for factors of production and market flow for output situation is called market for goods and services. > Circular flow diagram:- A visual model of the economy that shows how money flow through markets among households and farm. Page |10 Schabal Heyer ~ Stat 99raion! GOODS AND Rania} oer Sg a Preteen oe) oS ea ———=+ Flow of inputs and outputs poe ene Seer ee Poe ees ——— + Flow of money Renee oy Cent Feeney See - This diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. House-holds and firms interact in the markets for goods and services (where houscholds are buyers and firms are sellers) and in the markets for the factors of production (where firms are buyers and households are sellers). The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the corresponding flow of goods and services. Second Model: The Production Possibilities Frontier Production possibilities frontier a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology = A company can produce two products at a time, But they have scarce response of factors of production. In this, company how quantity produce of two products at same time that show by curve is called the production possibilities frontier. This curve show capacity of production. Page [a1 Schabal Heyer ~ Stat 993000 2200 Seen 1000 © a me He The Production Possibilities Frontier - The production possibilities frontier shows the combinations of output—in this case, cars and computers—that the economy can possibly produce. ‘The economy can produce any combination on or inside the frontier. Points outside the frontier are not feasible given the economy’s resources. A.and C- point: 1% products = J and another product = || ———+ Opportunity cost 2000 to 2200 computer | gain 200 & opportunity cost 100 B- point: Hence resource haven’t fulfil, resource reduces, so the production produce reduces, D- point: Production produces can’t possible. Because the factor of production are already fixed and out of production capacity. Efficient outcome: Point on production possibilities frontier curve Inefficient outcome: Point inward & outward production possibilities frontier curve Page [12 | eeShift in Production Possibilities Frontier 4000 3000 2300-4 om A Shift in the Production Possibilities Frontier- an economic advance in the computer industry shifts the production possibilities frontier outward, increasing the number of cars and computers the ‘economy can produce Figure-06; For technological advantage, factor of production will have increase. Maximum capacity to produce computer goes 3000 to 4000 fixed and curve will be change. This is shift in the production possibilities frontier. The Market Force of Supply and Demand Market: A group of buyers and sellers of a particular good or services, A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product, and the sellers as a group determine the supply of the product, ‘Competitive Market: A market in which there are many buyers and many sellers so that each has a negligible impact on the market price. A competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. Each seller of ice cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he or she charges more, buyers will make their purchases elsewhere, Similarly, no single buyer of ice cream can influence the price of ice cream because each buyer pur- chases only a small amount, Page |13 | eeDemand Quantity Demanded: The amount of a good that buyers are willing and able to purchase. If price increase, decrease demand. And if price decrease, demand increase. Law of Demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises, When price inerease of product, then demand be low. Its also depend on Environment. The Demand Schedule and the Demand Curve Demand Schedule:- a table that shows the relationship between the price of a good and the quantity demanded The Demand Curve: The relationship between price and quality. The downward-sloping line relating price and quantity demanded is called the demand curve. Catherine’s Demand Schedule: The demand schedule shows the quantity demanded at each price ford Rice Of Quantity eri) Tee- Of Cones 3 Cream Demande 3.00 Cone 4 2.50 $0.00 12 “Fewer | on a em cane 0.50 10 1.00 8 100 1.50 6 aed 2.00 4 0.50 2.50 2 3.00 0 ° 2 4 6 8 0 Catherine's Demand Curve- This demand curve, which graphs the demand schedule, shows how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward Page [14 | eeMarket Demand versus Individual Demand PRICE OF ICE- CATHERINE, NICHOLAS, MARKET CREAM CONE $0.00 2B + 7 = 19 0.50 10 6 16 1.00 8 5 13 1.50 6 4 10 2.00 4 3 7 2.50 2 2 4 3.00 0 1 1 ai > s oot Snes this price is 7 cones. Market Demand as the Sum of Individual Demands- The market demand curve is found by adding horizontally the individual demand curves. At a price of $2, Catherine demands 4 ice- cream cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the market at Individual And Market Demand Schedules- The quantity demanded in a market is the sum of the quantities demanded by all the buyers. Page [15 Bete Mayee Sa 9Shift in Demand Curve Decrease In gemane Demand curve, Do Demand une, Ds Demand cure, Da Ice-Cream Cones Shifts in the Demand Curve- Any change that raises the quantity that buyers wish to purchase at agiven price shifts the demand curve to the right. Any change that lowers the quantity that buyers wish to purchase at a given price shifts the demand curve to the left. Supply Quantity Supplied: the amount of a good that sellers are willing and able to sell. Law of Supply:- the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises. © Supply Equivalent Price Supply’s factor-i. Input prices ii, Technology iii. Expectation. If these factors are constant, supply will be equivalent to price Page |16 | ee0.50 FRB} 100 ‘The Supply Schedule and the Supply Curve Supply Schedule: a table that shows the relationship between the price of a good and the quantity supplied ‘Supply Curve:- a graph of the relationship between the price of a good and the quantity supplied Ben’s Supply Schedule: The supply schedule shows the quantity supplied at each price. Paice of Price Of | Quantity Nee Cee Iee- | of Cones $3.00 Cream | Supplied Cone 250 $0.00 2.00 | 1.50 pi 2.00 oes 2.50 oso 3.00 4232S 67 8 9901235 Quanity tie ‘Cream Cones Ben's Supply Curve: This supply curve, which graphs the supply schedule in Table 4-4, shows how the quantity supplied of the good changes as its price varies. Because a higher price increases the quantity supplied, the supply curve slopes upward. Shift in Supply Curve AL Shifis In The Supply Curve: Any change that raises the quantity that sellers wish to produce at a given price shifts the supply curve to the right, Any change that lowers the quantity that sellers wish to produce at a given price shifts the supply curve to the left. | eeSupply and Demand Together Equilibrium:- a situation in which supply and demand have been brought into balance Equilibrium Price:- the price that balances supply and demand Equilibrium Quantity:- the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand Law of Supply and Demand:- the claim that the price of any good adjusts to bring the supply and demand for that good into balance Surplus: a situation in which quantity supplied is greater than quantity demanded Shortage:- a situation in which quantity demanded is greater than quantity supplied Equilibrium Curve spy quorum see eats Feutbaum ‘anny The of Supply and Demand- The equilibrium is found where the supply and demand curves intersect. At the equilibrium price, the quantity supplied equals the quantity demanded, Here the equilibrium price is $2: At this price, 7 ice-cream cones are supplied, and 7 ice-cream cones are demanded. Page [18 | ee(ey enmee omen opi Sw su al wy ary, ieoonam toe econ Grae Markets not in Equilibrium: In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level. In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand. rc oo 4 ze a > D, — ae Su... ana anne ‘lee-Cream Cones How an Increase in Demand Affects the Equilibrium: An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here, an abnormally hot summer causes buyers to demand more ice cream. The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from 7 to 10 cones. Page |19 | eeShift in Supply Curve of Equilibrium Pace ‘eet ig Moana eds cone /svaciny ee coon How a Decrease in Supply Affects the Equilibrium. An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quantity falls, Here, an earthquake causes sellers to supply less ice cream, The supply curve shifts from $1 to $2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 cones, Shift in Supply and Demand Curve of Equilibrium SHIFT IN BOTH SUPPLY AND DEMAND Here we observe a Simultaneous increase in demand and decrease in supply. Two outcomes are possible. In panel (a), the ‘equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Qi to Q2. In panel (b), the equilibrium price again rises from P1 to P2, but the ‘equilibrium quantity falls from Q1 to Q2. Page |20 | eeUtility and Demand Utility: Utility refers to the total satisfaction received from consuming a good and service. The Utility of a goods or services is determined by how much satisfuetion a particular consumer obtains from it, Utility is not a quality inherent in the goods or services itself. A product when we use , how much satisfaction level gain its called utility. + Utility can be 0 at a time Total Utility: Total utility refers to the entire amount of satisfaction obtained from consuming various quantities of commodity. It is a acceptable measure of the number of units of utility a consumer gains from consuming a good, services or activity during a particular time period, + The higher level total utility, the greater that consumer level of satisfaction. «= TU=MUi+ MU2+ MUs+.. ++ MUn Marginal Utility: Marginal utility is the increase of total utility obtained by consuming one more unit of a goods, services or activity. It is the benefit of consuming an extra unit. + For fulfil our necessary of goods, services or activity, total utility increase and marginal utility decrease. + Asa consumer consumes more and more of a goods of services, its marginal utility falls av MUn ox The law of dimi When total utility is reduce from maximum, then marginal utility is negative. For what marginal utility is diminishing. For a units utility increase, marginal utility be decrease, this called diminishing marginal utility ishing marginal utility: When total utility is maximum, then marginal utility 0 Maximizing Utility: Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economics decision, "Utility maximization requires seeking the greatest total utility from a given budget "Utility will be maximum when consumer and satisfaction level are so increase Mur _ Mu P2 PZ Utility maximization requires secking the greatest total utility from a given budget. Utility is ‘maximized when total outlays equal the budget available and when the ration of marginal utility to price are equal for all goods and services a consumer consumes this is the utility maximizing condition. Page [2a OP eta Megur - Sut 19Relation between Total Utility and Marginal Utility Total utility rises at a decreasing rate. The rate of increase is given by the slope of the total utility curve, which is “Total Utility and Marginal Utility Curves” as well. The slope of the curve between 0 movies and 1 movie is 36 because utility rises by this amount when Mr. Higgins sees his first movie in the month. It is 28 between 1 and 2 movies, 22 between 2 and 3, and so on. The slope between 6 and 7 movies is zero; the total utility curve between these two quantities is horizontal. Page [22 WD Sele Mague ~ Stat 9?‘The Budget Constraint: A budget constraint is set of all those combination bundle which are affordable to the consumer at given prices and given income of the consumer. Our demand of goods, services or activity is fulfil by scarce budget. If we can’t fulfil our demand in scarce resource, is call budget constraint, * If budget constraint comes to satisfaction level, then we have to think about preference. We have to choice any one or more on preference. * Budget constraint is effect when remain maximizing utility + For utility maximize in fixed budget, marginal decision rule will be apply. Marginal decision rule: The marginal decision rule states that an activity should be expanded if its marginal benefit exceed its marginal cost. i. Marginal Benefit: The marginal benefit is the amount by which an additional unit of an activity increases its total benefit. © The marginal benefit of this activity is the utility gained by spending an additional $1 on the goods. ii, Marginal Cost: The marginal cost is the amount by which an additional unit of an activity increases its total cost. ‘+ The marginal cost is the utility lost by spending $1 less on another goods. Applying the marginal Decision rule: The marginal decision rule state that an activity should be expanded if its marginal benefit exceeds its marginal cost. ‘The marginal benefit of this activity is the utility gained by spending an additional $1 on the good. ‘The marginal cost is the utility lost by spending $ Iless on another good. MU _ Marginal ueitiey How much extra utility will be gain, — Marginal Benifit Example- Suppose that the marginal utility of good X is 4 and that its price is $2. Then an extra $1 spent on X buys 2 additional units of utility (MUX/PX4/2-2). If the marginal utility of good X is 1 and its price is $2, then an extra $1 spent on X buys 0.5 additional units of utility (MUX/PX=1/2=0.5). mun P2 uz 2 [I= Apple and 2= orange] here greater than uses for utility maximize. And apple maximize for gain satisfaction level. MUL muz -here equl uses for one product more gain and another product decline, Ata time demand will be reduce Apple and demand will be increase orange. Next at a time this will be remain on equal. State the utility maximizing condition: Utility is maximized when total outlays equal the budget available and when the ration of marginal utility to price are equal for all goods and services Mu(apple) _ Mu PlApple) (0) Page [23 OP eta Megur - Sut 19Deriving an Individual’s Demand Curve: Individual demand curve refers to a graphical representation of individual demand schedule. The individual demand curve can be derived from the price consumption Quantity Demanded curve. When a =5ib/month demand curve is to be drawn, units of money are measured on the vertical axis while the quantity of 2 commodity for which demand curve is to be drawn are shown onthe $2 Quantity Demanded =12Ib/month ° 5 12 Read horizontal axis. vidual demand curves in a given market. It shows the quantity demanded of the good by all individual at varying price point. os oS oo oo 2 5 8 3 16 1 12 10 18 40 a aa $2 58 10 42 18 16 7 eee ae Page |24 Schabal Heyer ~ Stat 99‘The market demand curve is the summation of al the individual demand curves in a given market. It shows the quantity demanded of the good by all individual at varying price point Budget Constraint: - the limit on the consumption bundles that a consumer can afford In economies, a budget constraint represent all the combination of goods and service that a consumer may purchase given income. A budget constraint occurs when a consumer is limited in consumption patterns by a certain income ee Pe Lye ee aes eee spe ten ete be cesses co dit teoms a1 Oa of pizza is $10, and the price of Pepsi is $2. Tha Consumers Budgot Constraint Number Pate Spnalng Spending Tel Garey ofPizas of Pepsi on Pizza. © on Pops! Spending of Papal 100 © $1,000 $0 1900 500: %0 50 00 100 "900 80 100 200 20 1900) 70 150 700 300 11900 “0 200 200 300 1000 50 20 500 S20 p00 0 300 00 cy 11900 250 20 250 200 70 1000 » 00 20 0 1900 Consumes 10 450 100 x0 900 bust constrain ° 500 ° 1.000 11900 ° 5 at Quantity of Piza Indifference curve:- a curve that shows consumption bundles that give the consumer the same level of satisfaction. Marginal Rate of Substitution:~ the rate at which a consumer is willing to trade one good for another. Consumer possibility preferences: The analysis of consumer possibility preferences is a crucial step in determining how a consumer maximizes satisfaction in his limited income/budget. Page [25 Sheba Hager ~ Stat 992 Figure ‘The Consumer's Praferencos The consumer’ preferences ae represented with indifference curves, which show the combinations cof pizza and Pepsi that make the consumer equally satisfied. Because the consumer prefers more ofa ‘good, point ona higher inference curve (bere) _ae preferred te points ona lower indifference une I The marginal rate of substation (MRS) shows the rat at which the consumers wllng to trade Pepsi for piaza. it measutes the quantity of Pepsi the consumer must be given in exchange for pizza, Four Properties of Indifference Curves Property 1: Higher indifference curves are preferred to lower ones. People usually prefer to consume more goods rather than less. This preference for greater quantities is reflected in the indifference curves. As Figure 2 shows, higher indifference curves represent larger quantities of goods than lower indifference curves. Thus, the consumer prefers being on higher indifference curves. Property 1: Higher indifference curves are preferred to lower ones. e b ‘curve J, Page 126 QO SleteMigur ~ Stat 99Property 2: Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for the other. In most cases, the consumer likes both goods. Therefore, if the quantity of one good is reduced, the quantity of the other good must increase for the consumer to be equally happy. For this reason, most indifference curves slope downward. Property 2: Indifference curves are downward sloping. SrPepe Indifference curve, J, 3 oy Property 3: Indifference curves do not cross. To see why this is true, suppose that two indifference curves did cross, as in Figure 3. Then, because point A is on the same indifference curve as point B, the two points would make the consumer equally happy. In addition, because point B is on the same indifference curve as point C, these two points would make the consumer equally happy. But these conclusions imply that points A and C would also make the consumer equally happy, even though point C has more of both goods. This contradicts our assumption that the consumer always prefers more of both goods to less. Thus, indifference curves cannot cross, Property 3: Indifference curves do not cross. se @ Page |27 | eeFigure 3 The Impossibility of Intersectn ‘ eecren at 2 situation lie this can never happen. Aezordng ‘ to these inference curves, the consumer would bbe equalysatised at points A,B, and C, even ‘though point C has mare of bath goods than 2 point A Quantity of Pest Property 4: Indifference curves are bowed inward. The slope of an indifference curve is the marginal rate of substitution—the rate at which the consumer is willing to trade off one good for the other. The marginal rate of substitution (MRS) usually depends on the amount of each good the consumer is currently consuming. In particular, because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little, the indifference curves are bowed inward. As an example, consider Figure 4. At point A, because the consumer has a lot of Pepsi and only a little pizza, he is very hungry but not very thirsty. To induce the consumer to give up 1 pizza, he has to be given 6 pints of Pepsi: The marginal rate of substitution ind a lot of pizza, so he is very thirsty but not very hungry. At this point, he would be willing to give up 1 pizza to get | pint of Pepsi: The marginal rate of substitution is 1 pint per pizza. Thus, the bowed shape of the indifference is 6 pints per pizza. By contrast, at point B, the consumer has little Pe curve reflects the consumer's greater willingness to give up a good that he already has in large quantity. Property 4: Indifference curves are bowed inward. Page 128 | eeTwo Extreme Examples of Indifference Curves 4 Ficure samy ‘Pop Bowed Indifference Curves 14 Indference curves ae usualy bowed inward. Th shape imps thatthe marginal rte of sub station MRS] depends onthe ‘ent ofthe two goods the feneumer consuming, At plat 1k the consumer hes itl pleza tel ch Papal cba vacgires 3 lot entra Pope! te induce hi Eile opens oftha plane The ‘marginal rate of substitution is 6 4 pints oF Pepsi per pizza, At point a 6, the congimer has much plaza and tle Peps soe requres nly text Pept nce tia to give up one ofthe pizzas: The marginal rate of eubettuton is 1 pint of Pepa per pizza. Inaierenes ofPaaa Perfect Substitute two goods with straight line indifference curves Perfect complements: - two goods with right angle indifference curve ‘3 shown in pane! (3). (o) Peroct Substitutes Page |29 eo Schabal Heyer ~ Stat 99Output and Cost Total Revenue: The amount that the firm receives for the sale of its output (cookies) is called its total revenue. Total Cost: The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, ete.) is called its total cost. Profit = Total revenue - Total cost, Opportunity Cost: Opportunity Cost represent the potential benefi an individual, investor or business misses out on when choosing one alternative over another. The idea of opportunity costs is major concept in economics. i. Explicit costs: Explicit costs is input costs that require an outlay of money by the firm ii, Implicit costs: Implicit costs input costs that do not require an outlay of money by the firm The Production Function: The relationship be-tween the quantity of inputs (workers) and quantity of output (cookies) is called the production function, Production function the relationship between quantities of inputs used to make a good and the quantity of output of that good Total Product: In simple terms, we can define total production as the total volume or amount of final output produced by a firm using given inputs in a given period of time, Marginal product: Marginal product is the increase in output that arises from an additional unit of input Change in Output ‘Change in Input Marginal Produet (MP) Average Product: Average product is defined as the output per unit of factor inputs or the average of the total product per unit of unit and can be calculated by dividing the total product. Total Product (TP) Units of variable Factor Input Average Product (AP) = Diminishing Marginal Product: Diminishing marginal is product the property whereby the marginal product of an input declines as the quantity of the input increases, Production: Production is a process of converting resources into products or Services. Page 130 OP eta Megur - Sut 19Example- ‘Numbers of | Output Cost of Cost of | Total Cost of Worker | (Quantity of | Product of | Factory Workers | Inputs (Cost Cookies per | Labor of Factory + Hour) Cost of Workers) 0 0 30 $30 30 30 1 50 50 30 10 40 2 90 40 30 20 50 3 120 30 30 30 60 4 140 20 30 40 70 5 150 10 30 50 80 6 155 30 60 90 ume of (coosien pernoun ‘A production function shows the relationship between the number of workers hired and the quantity of output produced. Here the number of workers hired (on the horizontal axis) is from the first column in Table 13-1, and the quantity of output produced (on the vertical axis) is from the second column, The production function gets flatter as the number of workers increases, which reflects diminishing marginal product. Page [31 | eeThe Total-Cost Curve 0 10 20 30 40 50 60 70 G9930010320130300150 game A total-cost curve shows the relationship between the quantities of output produced and total cost of production, Here the quantity of output produced (on the horizontal axis) is from the second column in Table 13-1, and the total cost (on the vertical axis) is from the sixth column. The total- cost curve gets steeper as the quantity of output increases because of diminishing marginal product. The Various Measures of Cost = Total Cost: The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, ete.) is called its total cost |. Fixed Costs: fixed costs is that do not vary with the quantity of output produced 1. Variable Costs: Variable Cost is the variable cost that do vary with the quantity of output produced. = Average Total Cost: Total cost divided by the quantity of output is called average total cost. = Average Fixed Cost: Fixed costs divided by the quantity of output called average fixed cost. = Average Variable Cost: Variable costs divided by the quantity of output is called average variable cost. = Marginal Cost: Marginal cost is the increase in total cost that arises from an extra unit of production. Page [32 | ee‘Output (Cups | Fixed | Variable | Total | Average | Average | Average | Marginal of Coffee per | Cost | Cost | Cost Fixed | Variable | Total Cost hour) Cost Cost Cost 0 $3.00 | $0.00 | $3.00 [= - - $0.30 1 3.00 | 030 | 330 | $3.00 | 0.30 | $3.30 0.50 2 3.00 | 080 | 380 | 1.50 0.40 1.90 0.70 3 3.00 1.50 4.50 1.00 0.50 1.50 0.90 4 3.00 | 240 | 540 | 0.75 0.60 1.35 1.10 5 3.00 3.50 6.50 0.60 0.70 130 1.30 6 3.00 | 480 | 780 | 0.50 0.80 1.30 1.50 7 3.00 | 630 | 9.30 | 0.43 0.90 133 1.70 8 3.00 | 8.00 | 1130 | 0.38 1.00 1.38 1.90 9 3.00 9.90 12.90 0.33 1.10 1.43 2.10 10 3.00 | 12.00 | 15.00 | 030 1.20 1.50 OPS SS BET 8S 30 Quantiy al Ope “omnes ot emonede per neu) Total Cost Curve- Here the quantity of output produced (on the horizontal axis) is from the first column in Table 13-2, and the total cost (on the vertical axis) is from the si ‘ond column, As in Figure 13-3, the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product. 2 Page 133 Schaal Hager Stet 79Rising Marginal Cost Quonty of Out {exoses ot emonaae per nu) Average Cost And Marginal-Cost Curves: This figure shows the average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC) for Thirsty ‘Thelma’s Lemonade Stand. All of these curves are obtained by graphing the data in Table 13-2. These cost curves show three features that are considered common: (1) Marginal cost rises with the quantity of output. (2) The average-total-cost curve is U-shaped. (3) The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost. Relationship between Marginal Cost and Average Total Cost Quantity |Total | Fixed | Variable | Average | Average | Average | Marginal of Bugles | Cost Cost ‘Cost Fixed Variable | Total Cost per hour Cost Cost Cost 0 {$2.00 $2.00 [$0.00 |= - - 1 3.00 2.00 | 1.00 $2.00 $1.00 $3.00 $1.00 2 | 3.80 2.00 | 1.80 | 1.00 0.90 1.90 0.80 3 4.40 2.00 2.04 0.67 0.80 147 0.60 4 | 4.80 2.00 | 2.80 | 0.50 0.70 1.20 0.40 5 5.20 2.00 3.20 0.40 0.64 1.04 0.40 6 | 5.80 2.00 | 3.80 | 0.33 0.63 0.96 0.60 7 6.60 2.00 4.60 0.29 0.66 0.95 0.80 8 | 7.60 2.00 | 5.60 | 0.25 0.70 0.95 1.00 9 8.80 2.00 6.80 0.22 0.76 0.98 1.20 10 | 10.20 |2.00 | 8.20 | 0.20 0.82 1.02 1.40 IL 11.80 2.00 9.80 0.18 0.89 1.07 1.60 12 | 13.60 2.00 | 11.60 | 0.17 0.97 114 1.80 13 15.60 | 2.00 13.60 | 0.15 1.05 1.20 2.00 14 [1780 [2.00 15.80 | 0.14 1.13 1.27 2.20 Page [34 OP eta Megur - Sut 19‘© Marginal cost eventually rises with the quantity of output. @ the average-total-cost curve is U-shaped. © the marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost, Cost Curves- Many firms, like Big Bob’s Bagel Bin, experience increasing marginal product before diminishing marginal product and, therefore, have cost curves like those in this figure. Panel (a) shows how total cost (TC) depends on the quantity produced. Panel (b) shows how average total cost (ATC), average fixed cost (AFC), average variable cost (AVC), and marginal cost (MC) depend on the quantity produced. These curves are derived by graphing the data from Table 13-3. Notice that marginal cost and average variable cost fall for a while before starting to rise. Page [35 QO SleteMigur ~ Stat 99The Relationship between Short-Run and Long-Run Average Total Cost ATCinshot —ATCinshort ATC short un win un wt runwatn oreyiesoy ‘mediumfactory largefactory ATC inlongrun Average Total Cost in the Short and Long Runs. Because fixed costs are variable in the long run, the average-total-cost curve in the short run differs from the average-total-cost curve in the long mun, Page |36 QO SleteMigur ~ Stat 99Market Economy Competitive Market: An economic system in which production and prices are determined by unrestricted competition between privately run enterprises. A competitive is one where there are numerous procedures that compete with one another in hopes to provide goods and services we, as consumers, want and need. In other word, not one single procedure can dicate the market. Also like procedures, not one consumer can dicate the market either. Three Condition of Competitive Market:- @ there are many buyers and many sellers in the market. # the goods offered by the various sellers are largely the same. Firms can freely enter or exit the market (Only for Long run) Example: ‘* Anexample is the dairy market. No single milk buyer can affect the price of milk because each buyer buys a small amount related to market size. Similarly, each dairy retailer has a limited price ability because many other retailers offer exactly the same milk. Because each retailer can sell everything they want at a moving price, they have less reason to charge less, and if they charge more, buyers will go elsewhere. Buyers and sellers in competitive markets must accept the price determined by the market and therefore, they are said to be price sellers. The Revenue of a Competitive Firm Revenue: Revenue is the total amount of revenue generated by the sale of goods or services related to the company's core activities. The revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. Revenue (R) = Price * Quantity Average Revenue: Average revenue is the revenue per unit and is therefore defined as the total revenue divided by the total selling price total cost. This refers to the amount of money earned per individual unit or user. _ Total Revenue) Average revenue (AR) = Stoners Marginal Revenue: Marginal revenue is additional revenue earned through the sale of one more unit of a good item or service. It can be calculated by comparing the amount of revenue generated from a given sales number (e.g. 5 units), with the total revenue generated from the sale of one additional unit (e.g. 9units).. This refer to the change in total revenue from the sale of each additional unit of output or additional unit. The marginal revenue is the rate of change of the total revenue. Change of Total Revenue(ATR) ‘Change of Quantity(4Q) Marginal revenue (MR) Page 137 OP eta Megur - Sut 19erring Penn Gr mer sa cre CRM crn carats @ Ser ak CUS) I edt) 1 10 Taka 10 Taka 10 Taka 10 Taka 2 9 18 9 8 3 8g 24 8 6 4 7 28 7 4 5 6 30 6 2 6 5 30 3 0 7 4 28 4 2 8 3 24 3 -4 9 2 18 2 6 10 1 10 1 “10 From this table we can draw the idea that as the price drops from 10 Taka to 1 Taka, the sale price increased from | to 10. However, in unit 6 it remains unchanged and eventually begins to fall into the next unit ic. 7. Similarly, when AR falls, MR falls sharply and becomes zero in the 6th unit and becomes negative, Thus, it is clear that when AR falls, MR also falls above AR: TR rises initially at a slower rate, reaches higher and begins to fall. How much revenue does the farm receive for the typical Quantity of Ice Cream? Answer: In the table, the fourth column shows the average revenue, which is the total value ({iom the third column) divided by the output value (from the first column). The median income tells us how much the firm eams per standard unit sold. In this table we can see that the average revenue is decrease, the price of a Ice cream, This illustrates a common lesson that applies not only to competing firms but also to other firms, Total revenue is the price times by quantity (Q), and the average income is the total amount (P*Q) divided by the quantity (Q). Therefore, in all firms, the average income is equal to the price of the good. @ How much additional revenue does the farm receive it per quantity? Answer: Inthe table, the fifth column shows the Marginal revenue, which is the conversion of total revenue from the sale of each additional unit output. The per capita income is decrease, the price of Ice cream. This result reflects a lesson that only applies to competing firms. The total revenue is P*Q, and P is designated by a competing firm. Therefore, when Q increases by 1 unit, the value of revenue decrease by P taka. For competing firms, income is equal to the fair value of goods. \creases production of Ice cream Profit Maximization and the Competitive Firm's Supply Curve When does the goal of a competitive firm profit maximize? Answer: The goal of a competitive firm is to maximize profit, which equals total revenue minus total cost. Page 138 | eeProfit Maximization 10 40 90 -50 $40 $28 20 80 110 -30 40 20 30 120 126 6 40 16 40 160 138 22 40 12 50 200 150 50 40 12 60 240 165 15 40 15 70 280 190 90 40 25 80 320 230 90 40 40 90 360 296 64 40 66 100 400 400 0 40 104 110 440 550 -110 40 150 120 480 715 235 40 175 In the table, the horizontal axis shows the number of frozen raspberries produced. The upward axis shows both the total amount of revenue and total costs, estimated in dollars. The full cost curve crosses with a vertical axis at a value that indicates the level of fixed costs, and then the slopes at the top, first at a descending rate, and then at an increasing rate. In other words, the costs ofa fully competitive company have the same characteristics as the curves we have covered in the previous module in production and cost How much number of frozen raspberries can produce by sellers? Answer: 120 number of frozen raspberries. Because profit level maximize at quantity of 120 produced. The profit level maximization is $235. Because we know that If profit level decrease, seller do not produce more. Profit Maximize can defined at three way:~ 1 Compare profit with quantity I Compare marginal revenue with profit II, Compare marginal cost with profit Profit with Marginal Revenue and Marginal cost:~ i, Marginal Revenue > Marginal Cost + Profit Increase ii, Marginal Revenue = Marginal Cost > Profit Maximize iii, Marginal Revenue < Marginal Cost » Profit Decrease Page 139 | eeThe Marginal-Cost Curve and the Firm’s Supply Decision ‘The firm maximizes profit by producing the quantity at Costs and Which marginal cost equal Revenue ‘marginal revenue mc Mc ATC PoMR:=MR2 P=AR=MR AVC Mey Quantity Profit Maximization for a Competitive Firm- This figure shows the marginal-cost curve (MC), the average-total-cost curve (ATC), and the average variable cost curve (AVC). It also shows the market price (P), which equals marginal revenue (MR) and average revenue (AR). At the quantity Ql, marginal revenue MR1 exceeds marginal cost MCI, so raising production increases profit. At the quantity Q2, marginal cost MC2 is above marginal revenue MR2, so reducing production increases profit, The profit-maximizing quantity QMAX is found where the horizontal price line intersects the marginal-cost curve. The Firm's Short-Run Decision to Shut Down cost) Firm’s short-run supply curve Mc Firm shuts down ifP The firm's owner make decision for continue in long time that he/she exist or enter in market Costs Mc Firm’s long-run supply curve. Firm exits TC) iP ATC ‘The criterion for entry is exactly the opposite of the criterion for exits. + In long-run consider Total Cost (TC), because in this term have fixed cost. + Long-run: decided exit and enter in market and considered Total Cost (TC). Imperfect Competition: Imperfect competition is a competitive market situation where there are many buyers and sellers, but they sell different goods not like the full competitive market situation. This market don’t follow rule of competitive market Different Types of imperfect competition in market:- © Monopolistic: Competitive competition reflects an industry where many firms offer similar products or services, but not the right motives. The costs of production are above what perfectly competitive companies can achieve, but society benefits from the distinction of the products, © Monopoly: A Monopoly company produces a small product, has a high cost, and sells product at a higher price than if it were limited by competition, These negative effects create ‘more government control. © Oligopoly: This is a market with only a few firms. They built a cart to reduce productivity and increase profits the way the monarchy did. It includes the duopoly, which is a type of oligopoly, with only two firms in one industry. ‘© Monopsony: Monopsony is a market situation where there is only one buyer and many sellers. © Oligopsony: Oligopsony is a market situation where there is few buyer and many sellers. S Page [42 OP eta Megur - Sut 19Break-even Point of Production: A point and even a point is the level of production at which the total income is equal to the total cost. In other words, a break-point where a company generates the same amount of revenue as expenses can be between the production process or the accounting period. If we want to determine how many units can be produced and sold to break even, it is given by the following Formula: FC Break-even point of production= ~~ VC. ©) Break-even Point of Production Price Total Revenue Total Cost Break- even point %, © Profit PL © Loss Quantity, Example:- The total fixed cost of a manufacturing company is $300,000 and the variable cost per unit produced is $150 and the selling price of one unit is $300. Calculate the break-even point of production. Solution: We know that, Break-even point of production = FC/P — VC = 300,000/300 — 150 = 2,000 ‘These are 2000, the number of units that must be produced and sold to break-even. Shut-down Point of Productior prefer shutting down their operation instead of continuing to operate. A closing point is a level of performance where the company does not make a profit by continuing to operate and therefore he shut-down point refers to the minimum price where companies decides to close temporarily - or in some cases it is permanent, It is the result of a combination of ‘output and price in which a company earns enough money to cover its total variable costs. A closing point means the exact moment when the company's (private) money is equal to its variable (separate) costs - in other words, it happens when the net profit becomes worse Page [43 OP eta Megur - Sut 19GD shut-down Point of Production Price Break-even price P2 Shut-down price Pa ‘Shut-down point ° ® & Quantity Efficiency: Economic efficiency is when all goods and services in the economy are transferred or allocated for their most important use and waste is eliminated or reduced. An individual firm will product at QI, where MR=MC. At this equilibrium, we can examine the efficiency of the market There are two type of Efficiency:~ 1 Allocative efficiency: occurs where P = MC. In this case, the firm will be allocatively efficient at P=MC. In both the short and long run we find that price is equal to marginal cost (P=MC) and thus allocative efficiency is achieved. Productive efficiency: Allocative efficiency occurs when consumers pay a market price that, redirects the autonomous costs of the product. The condition for allocative efficiency for a firm is to produce an output where marginal cost (MC), just equals price (P). Economy pricing: An economic price is a form of price in which a lower price is given to a product with lower production costs. Targets the mass market and high market share. Example: wash detergents, local tea producers. There are several pricing strategies: 1 Price skimming: When you use a price skimming strategy, you're launching a new product or service at a high price point, before gradually lowering your prices over time. This is a great way to attract consumers especially high-income shoppers who consider themselves carly adopters or trendsetters. Penetration pricing: A penetration pricing strategy is the opposite of price skimming, Instead of starting with high prices, you start with low prices and gradually increase them as they gain traction, While this does put you at risk for limited or zero profit in the beginning, depending on how low you actually go, it also quickly converts. In the same way that a free sample can encourage a customer to make a purchase, you're providing a discounted experience to create customer loyalty. Page [44 OP eta Megur - Sut 19