Unit

1
Fundamental Economic
Concepts

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 Introduction
Economics:

The science that deals with production and consumption of

goods and services and the distribution and rendering of
these for human welfare.

ECONOMIC GOALS Growth

Price stability and efficiency

An equitable distribution of income

A high level of employment

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 Flow in an Economy
Money payments for goods and services

Consumer goods and services

Business Households
• Provides goods and services • Consumes final goods and
to consumers services produced by business
• Use resources, inputs and services
provided by households • Provides productive inputs to
business

Money payments for resources, rents, wages, salaries, interest and profit

Economic resources: Land, Labour, Capital 3

Fig. 1: Flow of goods, services, resources and money payments in a simple economy
 Nature of Economic Theory

• Macro economics examines

the aggregate behaviour of
the economy.
• Micro economics focusses on how
decisions are made by individuals • This studies the behaviour of
and firms and the cause of those economy as a whole not just
decisions. on specific industries.
• Measuring inflation or
• This focusses on specific
unemployment comes under
companies in specific industry
macroeconomics.
sectors.
• These concepts are not
• Micro economic concepts are simple & direct.
simple & easy to understand.
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 Micro Economics

This is the study of economic behaviour in very

small segments of the economy, such as a
particular firm or house hold.

Macro Economics (economy as a whole)

Theoretical study of entire economic system in

terms of national income, flow of money,
consumption, investment, general prices
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Difference between Micro & Macro Economics

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Concept of Value and Utility

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Types of Utility

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 Types of Goods:

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Demand Analysis

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Demand Analysis

Individual Household
Demand Market/ Aggregate
Demand
Demand

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Law of demand:
The law of demand says “ demand for an item increases with a fall
in price and diminishes with rise in price, other things remaining
the same.”
The law of demand operates due to underlying effect:
 Substitution effects of price change.
 Income effect of price change

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 Factors Influencing Demand:
The shape of the demand curve is influenced by the following factors:
 Income of the people
 Price of item or product
 Prices of related goods
 Tastes and Preferences of customers.
Demand Curve
 Advertisements
 Expectations

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Exceptions to the Law of Demand

1. Commodities which are used as status symbol

2. Expectations of change in the price of the

commodity

3. Giffen goods – inferior goods, in whose case

income effect is stronger than the substitution
effect. Ex- potatoes Cereals, fruits

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Law of Supply:
 Supply is derived from a suppliers desire to maximize profits.
 Supply is the quantity of a commodity which is offered for sale
at particular price.

The law of supply states that, “other

things remaining constant more of
commodity is supplied at higher price
and less of it is supplied at lower
price.”

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Factors Influencing Supply:
The shape of the demand curve is influenced by the following factors:
i. Costs of the inputs
ii. Technology
iii. Weather
 Costs of the inputs: Cost of input increases, cost of products
increases which reduces the profit margin. So producers will then
reduce production quantity which in turn affect supply.
 Technology: Will create reduction in production cost per unit,
which will create greater profit margin. So producers will supply more.
 Weather: it is also having influence on the supply. Eg woollen
clothes in winter.

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Equilibrium of Demand and Supply

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