By

Currenc-I Club, IIM Indore

Aditya | Arjit | Priyadarshini | Sandesh |
The two major divisions are Macro and Micro
Economics
Macro : Provides a holistic view about the
economy that covers GDP, Inflation, Monetary
and fiscal policies, Unemployment, BOP (
balance of payment) and growth rate of the balance of payment) and growth rate of the
economy etc.
Micro : Analyses the individual decision
making units which covers the factors that
affect the demand and supply, prices of the
goods and elasticity etc.
Demand & Supply
Demand- Quantity expected to be
purchased by consumers at different
price levels
Supply- Quantity supplied by the
industry at different price levels
As the price of good increases demand As the price of good increases demand
falls (consumers do not prefer the good
due to high price) and supply increases
(manufacturers gets more revenue due
to increased price)
Hence demand is a downward sloping
and supply is an upward sloping curve
Equilibrium level is given by the point
of intersection and the corresponding
price is equilibrium price
Elasticity is a measure of ratio of percentage change
in one variable to percentage change in other variable
Price Elasticity Measures change in quantity
demanded in response to change in price of the good
Price Elasticity = Q(%age Change in Demand) / (P %age change in Price)
Income Elasticity- Measures percentage change in
quantity demanded due to change in income quantity demanded due to change in income
Income Elasticity = Q(%age Change in Demand) / I(%age change in
Income)
Note- The above quantities measure price and
income elasticity of demand. Similarly there can be
elasticity of supply where the numerator is replaced
with change in quantity of supply.
The demand is perfectly
elastic at price $15
At any other price point
demand is zero
This is an example of This is an example of
perfectly elastic demand
curve
The curve is also called
infinitely elastic curve
This curve represents
perfectly inelastic or
zero elastic demand
curve
The curve shows that
the demand remains at a
particular quantity
the demand remains at a
particular quantity
irrespective of the price
level
The same can be applied
for the supply side curve
E.G. There can be
perfectly inelastic supply
curve
There are four different types of markets
Perfectly competitive
Monopoly
Monopolistic competition
Oligopoly Oligopoly
There are many players with each one holding
a small market share
There are no entry and exit barriers i.e. It is
easy to enter and exit the business
All the products produced by different
manufacturers are identical
All the products produced by different
manufacturers are identical
Prices are determined by demand and supply
of the product, not by the firm
Perfectly competitive firms have perfectly
elastic demand curve
There is one supplier in the entire market who
produces a product which is exclusive and has no
good substitutes
The barriers to entry are very high
Legal Barriers
Natural Barriers Natural Barriers
Patents copyrights and government franchisees
are few legal barriers
Natural Barriers- A firm can reduce the cost of
production by producing more (Economies of
Scale) and they sell at a cheaper price which
cannot be done by other players
Large number of competitors produce
differentiated products
Product differentiation gives degree of
market power to each firm
Firms compete on price quality and marketing
due to product differentiation. Quality is a
Firms compete on price quality and marketing
due to product differentiation. Quality is a
significant product differentiation
characteristic and price is set by the firms
based on the demand supply relation
Barriers to entry and exit are low and hence it
is easy to enter and exit the business
The market is characterized by small number of
sellers
There is interdependence amongst the sellers
and hence decision by player is affected by other
players decisions players decisions
Products may be differentiated or similar
Significant barriers to entry due to which each
firm has large economies of scale. Due to
significant barriers of entry there are very few
players who supply the entire market hence they
have large economies of scale
GDP
Total Market value of all final goods and Services produced within
an economy
Check out GDP/NDP/GNP Check out GDP/NDP/GNP Check out GDP/NDP/GNP Check out GDP/NDP/GNP
Rate of changes in price
Inflation
Rate of changes in price
Find out the two main indexes for inflation measurement Find out the two main indexes for inflation measurement Find out the two main indexes for inflation measurement Find out the two main indexes for inflation measurement
Interest Rates
Real interest rate is the rate at which your money grows after
accounting for inflation
Find out the difference between Real and Nominal Interest rates Find out the difference between Real and Nominal Interest rates Find out the difference between Real and Nominal Interest rates Find out the difference between Real and Nominal Interest rates
Revenue Deficit: Revenue Expd Revenue
Receipts
Fiscal Deficit: Total Expd ( Revenue
Receipts+ Recovery of loans + Receipts from
PSU disinvestment) PSU disinvestment)
Primary deficit: Fiscal Deficit- Interest
Payments
Government and RBI uses various tools to
influence the growth of the economy
Monetary policy (RBI)
1. Control money supply
2. Control interest rates
Fiscal policy Fiscal policy
1. Manage the government revenue
2. Manage government expenditure
Find Find Find Find out: out: out: out: <CRR <CRR <CRR <CRR, Repo rate, reverse repo, , Repo rate, reverse repo, , Repo rate, reverse repo, , Repo rate, reverse repo, SLR> SLR> SLR> SLR>
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