Economics FYBMM: Terms and concepts - Part 5: Micro And Macro Economics

Micro and Macro Economics:
These are two approaches to the study of Science of Economics. In micro economics we analyze the behavior of individual economic units such as individual consumer, producer etc. In macro economics we are concerned with the aggregates i.e. the behavior of the economy as a whole. 

Distinction between Micro and Macro Economics:

1. Unit of Study	Micro Individual	Macro Aggregate
2. Method	Slicing	Lumping
3. Subject Matter	Study of product & Factor pricing etc.	Study of National income, general level of prices, trade cycles etc.
4. Basis	Based on Independence	Based on inter-dependence
5. Advocated by	Alfred Marshall	J M Keynes
6. Vision	Worm’s eye view. Study of a tree	Bird’s eye view. Study of a forest as a whole.

What is true of an individual may not be true of for the economy as a whole. Hence the two approaches. 

Economics FYBMM: Terms and concepts - Part 4: Profit, Optimisation, Avg Cost, Marginal Cost

Profit:

In common terminology excess of revenue over its cost is profit. In Economics we refer to profits as rewards to the organization (entrepreneur) as a factor of production for its participation in the process of production.
Profit is further split into Gross profit, which is Total Revenue less explicit costs that are shown on in the books of accounts. Gross Profits less Depreciation and Taxes are termed Net Profits.

Optimisation:

Optimisation is making the best possible use of available resources to obtain the maximum possible desired quality of output.

Average and Marginal:

These concepts are applicable to revenue, cost, and propensity to consume and save.
Average cost (AC) = Total cost/Units of Output Produced
While marginal cost (MC) is additional cost for producing additional unit of output.

Either,


MCnth = TCn - TCn-1

Or


MC = ΔTC/ΔQ 

Elasticity:

By elasticity we mean the degree of responsiveness of change in one variable brought about by the change in some other variable. Thus degree of responsiveness of quantity demanded of X to the change in price of X is called Price Elasticity of Demand. 

Economics FYBMM: Terms and concepts - Part 3: Cost, Price, Competition, and Monopoly

Cost:
Production involves cost. The cost of production is defined as the aggregate of the expenditure incurred by the producer in the process of production. Cost is also valuation placed on the use of resources.
There are several concepts of costs and these are discussed in the chapter on Cost Analysis.

Price:
The value of anything expressed in terms of money is the ‘Price’ of that thing. There are two concepts of price namely; Market Price and Normal Price. Market price is the price, which actually prevails in the market at a given time. Normal price is the one that is normally expected to prevail in the long run.
The demand side determines the market price as in the short time supply is assumed to be almost inelastic.
In the long run supply is capable of adjusting itself, and hence Normal price is more influenced by supply side.

Competition:
In absence of monopoly a degree of competition is always there in the markets. It can be either perfect or imperfect. The latter has several forms such as monopoly, duopoly, oligopoly or monopolistic competition.

Monopoly:
Monopoly is that market category in which there is a single seller. Features of monopoly are
1. Existence of a single firm.
2. Firm is itself an Industry.
3. Absence of a close substitute.
4. Barriers to entry of a new firm.
5. A monopolist can fix either the price or output, but not both. 

Economics FYBMM: Terms and concepts - Part 2: Supply, Production, Distribution, Consumption

Supply:
Supply of any commodity refers to various amounts of the commodity which the sellers are willing to sell at different possible prices at any given time.
Please refer to later chapters for complete understanding of the concepts of Supply and Demand.

Production:
Production, as commonly understood, refers to creation of something tangible, which can be used to satisfy human want. The process of addition of utilities to the existing matter by changing its form, place and keeping it over time is referred to as Production in Economics. Technologically conversion of inputs into outputs is production. We need Land, Labour, Capital and organization to undertake production. These four are called Factors of Production.

Distribution:
The term distribution in Economic Theory refers to the sharing of the wealth produced in the community among the various factors of production. These rewards to the factors are known by Rent for Land, Wages for Labor, Interest for Capital and Profits for the organization.
However, in general, the term distribution is loosely used to denote the process by which the goods and services produced are made to reach, through different stages to the final consumers.

Consumption:
Consumption, in Economics implies destruction or use of utilities for satisfying human wants. As consumer starts consuming unit after unit of a commodity his total utility or satisfaction goes on increasing but at the diminishing rate. This continues until total utility is the maximum and marginal utility is minimum ultimately reaching zero.
If the price of the commodity is to be considered, then he will consume it until its marginal utility equals the price of the commodity. 

Thus,

MU X = Price of X

The consumer in reality consumes a variety of commodities and at that stage will consider price of each commodity as well as total income at his disposal. The Law of equi- 

MU indicates that,

MUx /Px = MUy/Py = MUz/pz 

Economics FYBMM: Terms and concepts - Part1: Wants, Utility and Demand

Wants:
Human wants are the starting point of all economic activities. Wants refer to the lack of satisfaction, a state of discomfort, which every individual desires to eliminate.
They can be classified into Necessities, Comforts and Luxuries.
They are unlimited. All wants cannot be satisfied simultaneously and fully.
But resources to satisfy them are limited and scarce. These resources have alternative uses.
The allocation of scarce means having alternative uses to meet our unlimited wants is fundamentally the problem of economics.

Utility:
Utility is the capacity of a good to satisfy human want. This is a relative and subjective concept because the same good appears to possess different utility to different individuals at different places and different times.
Total utility means aggregate of utilities derived from consuming all the units of the commodity. Marginal utility is the additional utility by consuming one more unit of the commodity. Hence Total utility is summation of all marginal utilities.
Thus,
TUn = MU1st + MU2nd + MU3rd ........+ MUnth
... TU= ∑ MUs
Whereas marginal utility is MUnth = TUn – TUn-1
Marginal utility goes on diminishing as the consumer goes on consuming unit after unit of that commodity. This phenomenon is called the Marshallian Law of Diminishing Returns.

Demand:
In economics desire backed by purchasing power is the demand. The purchasing power depends on the level of prices and the disposable income of the consumer. Therefore, demand is the desire of the consumer to buy and it depends on his ability to pay as well as his willingness to pay.
Demand = Desire to buy + Ability to pay + Willingness to pay