So to speak, Economics is a science that studies human behavior as a relationship between ends and scares means with its alternative uses. The famous Economist Lionel Robbins gave this definition.

  • The science of Economics was born with the publication of Adam Smith’s An Inquiry into the Nature of Wealth of Nations in the year 1776.
  • In fact, after this publication, Adam Smith became the father of Economics.
  • As it happens that, at its birth – the name of Economics was Political Economy.
  • Later on, towards the end of the 19th century, there was a definite change from the use of the word ‘Political Economy’ to ‘Economics’.

Table of Contents

History and Background

The word ‘Economics’ derives from two Greek words oikou (a house) and nomos (to manage). Thus, the word economics was used to make management of house activities. Further, such arrangements were with limited funds available in most of the economical manner possible. Furthermore, the famous Economist Paul A gives a definition as below:

  • He defines Economics as “the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in future among various people and groups of society.”
  • Moreover, the definition above focuses on growth over time. Therefore, this definition is modern and has a wider scope. Further, this definition takes into account the consumption, production, distribution, and exchange of goods. Hence, it is acceptable universally, as it’s among the most satisfactory definitions of Economics.

How can a beginner learn Economics?

Firstly, one can pick up the books for economics before graduation. Further, references of the books are as below:

  • NCERT books in India – for economics. Further, for other reference books in economics in India
  • Besides, that for the best books – economic courses
  • Further, there are Audio books for economic courses.

What is Economics all about?

So to speak, the historical meaning said that – Economics was a science of using scarce resources to satisfy human needs and wants. Here, it meant more in terms of utilizing natural resources. Surely, this definition was incomplete, as, it missed some other important components. Later on, on its evolution stage –

  • The resources also included other components like utilizing the productive capacity of labourers.
  • Further, Education and newly acquired skills have raised the productivity of the labour force, leading to the discovery of new products and innovations in the past.
  • To begin with, our human history saw a lot of discoveries and inventions – like the innovation of petroleum, nuclear energy, electricity, etc.

Problems faced:

Day-to-day life problems as faced

Moreover, on the other hand, the resulting growth in production and income was not going parallel. As a matter of fact, the demand of the resources, and its supply did not always match. Further, in the day-to-day economic activities, there were several problems, as mentioned below.

  • Firstly, it includes changes in the price of individual commodities, as well as their price level.
  • Secondly, there were problems to attain economic prosperity and a higher standard of living for some people. So to speak, there was an uneven distribution of resources.
  • So to speak, there was an uneven distribution of resources. Finally, there was no proper system to make sure that resources are accessible to all.

Therefore, the study of Economics helps to solve the day to day life economic problems like –

  • Changes in the price of individual commodities,
  • General price level changes,
  • Attaining Economic prosperity,
  • Providing a higher standard of living.

Theoretical problems as given by the Economists

Theoretically, there are three main causes of central problems in Economics:

  1. Unlimited Human Wants: New wants keep arising as human wants are unlimited.
  2. Limited Economic Resources: These resources are limited in supply in relation to their demand. Further, the problem of scarcity of resources is universal, which creates economic problems for every country in the world. The economic resources are classified into four kinds –
  • Natural Resources: land, air, minerals, forest, etc.
  • Human resources include labour.
  • Capital resources include machines, equipment, etc.
  • Entrepreneurial resources include the Entrepreneur.
  1. Alternative Uses of Resources: Nevertheless, the resources have alternative uses also. For this purpose, take the example – one can use a land to produce wheat or other grains, or build a commercial building, etc. This problem of choice leads to economic problems.

Kinds of Central Problems

According the Economist Samelson, there are three fundamental and interdependent problems in the economy. Mainly, they are – what to produce, how to produce, and for whom to produce.

1) Allocation of Resources – includes what to produce, how to produce, and for whom to produce?

What to produce: All in all, most of the resources are limited, each economy has to make a choice of the wants which are important for the economy as a whole. The reason is that resources used to produce food and cloth are in limit and given. Thus, an economy has to decide what goods it would produce for the availability of technology, cost of production, cost of supplying, and demand for the commodity. Thus, the problem of how much to produce is the problem of determining the quantity of each good to be produced. Theoretically, we study this problem under Price theory.

How to produce: To begin with, this question helps to find the choice/s of technique of production. We cannot apply it here as, leads to wastage and high cost. Theoretically, we study this problem under Theory of Production. Further, in a wider sense, mainly there are two type of techniques, as stated below –

  • Labour Intensive techniques
  • Capital Intensive techniques

For whom to produce: For this purpose, this question finds how to distribute the products among the various sections of the society. Moreover, National Product is taken, which is  the total output generated by the firms. In general, the total output ultimately flows to the households in the form of income that is their wages, rent, profits or interest. Theoretically, is called the Theory of Distribution.

2) Full Utilisation of Resources

This problem aims of how to achieve full employment of resources. It’s important that resources should not remain idle as it implies wastage of resources. In other words, the problem is to ensure full employment of all resources – especially labour. Hence, this problem is studied under the Theory of Income and Employment.

3) Economic Efficiency

This is a question of how to obtain efficiency in the utilisation of resources and distribution of what was produced. Thus, this is a problem of efficiency in production and distribution systems. ‘Efficiency’ is defined as a situation where it is possible to make anyone better off without making someone worse off. Hence, this problem is studied under Welfare Economics.

4) Economic Growth

This is a question of whether the economy’s capacity to produce goods and services grows from year to year. Further, economic growth is induced by savings and investments. Therefore, for example, economic development is induced by plenty of capital and forward techniques of production. Hence, problems of this type are studied under the Theory of Economic Growth.

Economy – Meaning and types

An Economy is an organization of economic activities which provides people with the means to work, and earn a living.  Further, there are three main forms of an economic system. They are:

  • The Market Economy
  • The Centrally planned Economy
  • The Mixed Economy

1) The Market Economy

Meaning and Features

In a Market Economy system, they determine the prices by the Market forces of demand and supply. Likewise, laissez-faire or Capitalist Economy, is the another term for we use for a Market Economy. Further, this economic system is based on private profit and assets. Moreover, it exists in North America, Japan, Australia, Western Europe, etc. The main features of the Market Economy are as follows:

  • Private ownership of property,
  • Freedom of enterprise,
  • Profit motive of production,
  • Price mechanism guides production decisions,
  • Existence of competition,
  • Consumers are supreme,
  • Very unequal distribution of income, and,
  • Absence of role of the government.

Further, it operates mainly through prices and profits. Moreover, price serves as a signal to the producers to decide what to produce, and to the consumers to decide what to consume. Lastly, if there are changes in the demand and supply conditions, the market undergoes with changes. Furthermore, the changes either systematic or automatic changes to adjust with the new situation.

2) The Centrally Planned Economy

Meaning and Features

Centrally planned economy or socialist economy or command economy is based on government control and social welfare motive. Further, some of the socialist countries were Poland, Hungary, Bulgaria, etc. Mainly, the main features of a centrally planned economy are as follows:

  • Both Public and Private ownership of property or factors of production,
  • Freedom in private sector, but, no freedom of enterprise in Public sector,
  • Social welfare motive,
  • Both price and planning mechanism, but, only in the private sector.
  • Considerable Inequalities exists,
  • Complete role of the government sector, and, limited role in private sector.

3) The Mixed Economy

Meaning and Features

To begin with, an Economy is also a mixture of capitalist and centrally planned economy. So to speak, India is an example of a Mixed Economy. Further, the main features of Mixed economy are:

  • Public ownership of property or factors of production,
  • No freedom of enterprise,
  • Social welfare motive,
  • Planning mechanism guides production,
  • No competition,
  • Absence of consumer’s sovereignty,
  • Restriction of freedom of occupation,
  • Inequalities of income reduced, and,
  • Complete role of the government.

Micro Economics and Macro Economics

So to speak, before 1930, there was only ‘one’ economics. Further, Ragnar Frisch coined the word ‘micro’ and ‘macro’ to denote the two economic branches. Thus, these two branches of economy are – Micro-economics and Macro-economics. Moreover, it is difficult to differentiate between micro and macroeconomics. According to Prof. Samuelson, both are complementary, and should be fully utilized for proper understanding of an economy. For this purpose, the difference between Micro-economics and Macroeconomics.

  • Firstly, Micro-economics studies the individual economic units, whereas Macro-economics studies aggregate economic units.
  • Secondly, Micro-economics deals with determination of price and output in individual markets. Further, Macro-economics deals with determination of general price level and national output in the country.
  • Thirdly, the basic parameter of Micro-economics is price, that is, consumers and producers take economic decision on the basis of price. Moreover, in the other the basic parameter is income, that is, economic decision related to consumption, saving, investment, etc. are on the basis of national income.
  • Fourthly, Micro-economics uses partial equilibrium method – by Alfred Marshall. Further, Macro-economics uses the general equilibrium by Walras.
  • Fifthly, Micro-economics aims at optimal allocation of resources. Whereas, Macro-economics aims at determination of aggregate output, national income, price level, and employment level in the economy.
  • Lastly, the examples of Micro-economics include Individual demand, per capita income, etc. Whereas, the examples of Macro-economics include Aggregate demand, national income, etc.

Let us study both the subjects of Economics in detail.

Micro Economics

Meaning and subject matter of Micro-economics

The word ‘Micro’ derives from the Greek word mikros meaning small. Further, Micro-economics deals with the small segments of the society. Thus, Micro-economics is defined as the study of behavior of individual decision making units, such as consumers, resource owners and firms. Likewise, it is they also call it ‘Price theory’, since its major subject matter deals with the determination of price of commodities and factors. Further, Micro-economics has both theoretical and practical importance. Mainly, it aims at solving the three central problems of an economy, i.e., what, how and, for whom to produce. Moreover, Micro-economics includes the following areas to study –

  • Product Pricing (Theory of Demand and Theory of Supply)
  • Factor Pricing (Theory of Distribution). For this purpose, it includes Wages, Rent, Interest, and, Profit.
  • Welfare Economics.

Importance of Micro economics

  • Firstly, it helps the government in formulating correct price policies.
  • Secondly, it assists in formulating economic policies which enhance productive efficiency and results in greater social welfare.
  • Thirdly, it explains the working of a capitalist economy where individual units (i.e. producers and consumers) are free to take their own decision.
  • Fourthly, it describes how in a free enterprise economy, an individual units attain equilibrium position.
  • Fifthly, it helps in efficient employment of resources by the entrepreneurs.
  • Sixthly, it assists the business economists to make conditional predictions and business forecasts.
  • Lastly, we use it to explain gains from trade, disequilibrium in the balance of payment position and determination of international exchange rate.
  • For example, Assembly of an automobile production. Fixed inputs: land and building, assembly lines, computerized plant and equipment. Variable inputs: worker-hours, component parts, energy.

Limitations of Microeconomics

To this end, Micro-economics fails to explain the functioning of an economy as a whole. Further, it cannot explain unemployment, poverty, illiteracy, and other problems prevailing at the country level.


Meaning and Subject-matter of Macro-economics

The word ‘Macro’ is derived from the Greek word makros meaning large. Macro-economics deals with aggregate economics. So to speak, the definition of Macro-economics says that – it is the study of overall economic phenomena. The problems of full employment, Gross National Product, savings, investment, aggregate consumption, aggregate investment, economic growth, etc. Therefore, they also call it the Theory of Income and Employment, as it has a major impact on it. Thus, the study of Macro-economics is used to solve many problems of an economy like monetary problems, economic fluctuations, unemployment, inflation, disequilibrium in the balance of payment, etc. Furthermore, the subject matter of Macro-economics includes the theories in the following areas.

  • The Theory of Income and Employment,
  • General Price level and inflation,
  • Inflation,
  • Economic Growth, and,
  • Distribution.

Importance of Macroeconomics

To begin with, Macro-economics emerged as the most challenging branch of economics. In fact, according to the Scientist Samuelson, no other area of economics is today more vital and controversial than economics.

  • Firstly, it gives an overall view of the growing complexities of an economic system. Further, it provides powerful tools to explain the working of the complex economic systems.
  • Secondly, it provides the basic and logical framework for formulating appropriate macroeconomic policies. This is with regards to inflation, poverty, unemployment, etc., to regulate and direct the economy towards desirable goals.
  • Lastly, it helps in analysing the reasons for economic fluctuations, and provide remedies.

Limitations of Macro-economics

  • Firstly, Macro-economics ignores structural changes in an individual unit of the aggregate. Further, the conclusions drawn on the basis of aggregate variables may be misleading.
  • Secondly, as Hicks puts it “most of macro magnitudes which figure so largely in economic discussions are subject to errors and ambiguities.”

Other terms used in Economics

Positive Economic analysis:

Positive economics deals with what or how an economic problem facing a society is actually solved. Further, Prof. Robbins held that economics was purely a positive science. In other words, in positive economics we study human decisions as facts which can be verify actual data. Moreover, the examples of positive economics are as follows:

  • Prices have been rising in India,
  • Increase in per capita income increases the standard of living of people,
  • India is an overpopulated country,
  • Water is made up of molecules.

Normative Economic analysis:

Normative Economics deals with what ought to be or how an economic problem should be solved. Further, Alfred Marshall and Pigou considered the normative aspect of economics. Further, they prescribe that normative science as it prescribes that course of action which is desirable and necessary to achieve social goals. In other words, in Normative economics there’s no reservation on passing value judgment on moral rightness or wrongness of things. Thus, Normative Economics gives prescriptive statements. To this end, examples of normative economics are:

  • India should spend on modern infrastructure,
  • We should give free education to the needy,
  • Government should stop Minimum Support Price to the farmers,
  • Government should guarantee a minimum wage for every worker, etc.

Opportunity Cost:

To begin with, in economic analysis, we widely use the concept of opportunity cost. They define Opportunity cost as the cost of alternative opportunity given up. For example, on an economic land, both potato and wheat are grown with the same resources. For this purpose, if we grow wheat, then, we give up the opportunity cost of producing certain quantity of wheat is the quantity of potato production. Further, it is clear that the question of opportunity cost arises only when the alternative resources.

Marginal Opportunity Cost or MRT:

Marginal cost is the rate of sacrificed goods to the rate of expanding goods.

Scope of Economics

So to speak, as discussed above, economics is broadly classified into Micro Economics and Macro Economics.

Micro Economics covers the below areas –

Utility does not mean usefulness. To begin with, in Micro-economics, the term utility includes:

  • Consumer’s Equilibrium
  • Theory of Demand
  • Elasticity of Demand
  • Production function and cost theory
  • Theory of Supply
  • Elasticity of Supply
  • Forms of Market

The above three topics in economics explain about the Consumers’ demand.

Consumer’s Equilibrium

In general, a consumer is one who buys goods and services for satisfaction of wants. Further, the objective of a consumer is to get maximum satisfaction from spending his/her income on various goods and services, given prices. For this purpose, suppose, a consumer wants to buy a commodity. To this end, how much of it should he buy, it answers that. Further, there are two approaches are used for getting an answer to this question.

  • Utility Approach,
  • Indifference curve approach,
  • Cardinal utility analysis,
  • Total and marginal utility,
  • Law of diminishing marginal utility,
  • Law of Equi marginal utility,
  • Ordinal utility analysis,
  • Application of demand theory.

Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a product divided by the marginal utility of a rupee, is equal to the price.

Consumer’s equilibrium = Marginal utility of a product/ Marginal utility of a price

• Generation,  Evaluation, and, Choice of the best of alternatives.

• Consumer behavior is rational.
• Consumer behavior is consistent.
There are two commodities in consideration.

Theory of Consumer Behaviour

  • Useful for understanding the demand side of the market.
  • Satisfaction or pleasure one gets from consuming it
  • Utility is subjective—a specific product may vary widely from person to person
  • Utility refers to want satisfying power of a commodity.
  • In objective terms, Utility may be defined as the “amount of satisfaction derived from a commodity or service at a particular time”.

The Utility Schedule and the Utility Curves.

The law of Diminishing Marginal Utility is numerically illustrated in terms of the utility schedule. Further, the utility schedule shows the Total Utility and Marginal Utility derived by a consumer as he consumes more, and more of good X.

Theory of Consumer Behavior

  • Useful for understanding the demand side of the market,
  • Satisfaction or pleasure one gets from consuming it,
  • Utility is subjective—a specific product may vary widely from person to person,
  • Utility refers to want satisfying power of a commodity.

In objective terms, utility they define as the “amount of satisfaction derived from a commodity or service at a particular time”.

Consumer’s equilibrium with Utility approach – The law of Diminishing Marginal Utility (DMU)

The marginal utility approach, is based on the concept of the law of diminishing marginal utility (DMU). Thus, before stating the law, we should know the basic factors about the utility concepts.

The exponents of the utility analysis have developed two laws which occupy a very important place in economic theory and they are:-

  • Law of Diminishing Marginal Utility, and
  • Law of Equi-Marginal Utility.

1) Utility

So to speak, the utility doesn’t mean usefulness. Moreover. The term utility refers to the want satisfying power of a commodity. Further, it means expected satisfaction, to a consumer when he is willing to spend money on a stock of commodity. Adding to it, the commodity which has the capacity to satisfy his want. Expected satisfaction is different from realised satisfaction takes place when the commodity has been consumed. Further, utility is essentially a subjective concept depending upon the intensity of consumer’s desire or want for that commodity at that time. Thus, utility differs from person to person, place to place, time to time. Lastly, utility is a cardinal concept and can be measured, they usually the units as Utils.

2) Total Utility (TU):

It is the aggregate of the utility that a consumer derives from the consumption of a certain amount of a commodity. Mathematically, Total Utility can a obtained by the sum of marginal utilities from the consumption of different units of the commodity.

TUn = MU1 +MU2 + ……. +MUn

3) Marginal Utility (MU):

It is addition made to the total utility as consumption is increased by one more unit of the commodity. Mathematically, it is calculated as:

MUn = TUn – TUn-1

Or, MUx = Change in Total Utility/ Change in units.

4) The Law of Diminishing Marginal Utility (DMU).

The law of DMU states that as the consumer has more of a commodity the marginal utility of the commodity falls. Further, the law of DMU is a psychological law arrived at by introspection and, by empirical evidence. According to the law, TU increases but at a decreasing rate and Marginal Utility falls. Further, it is a psychological law arrived at by introspection, and by empirical evidence. Moreover, according to the law, Total Utility increases but at a decreasing rate, and Marginal Utility falls.

In Law of Diminishing Marginal Utility, eventually, a point is reached where the marginal utility obtained by consuming additional units of a good starts to decline, ceteris paribus.

So to speak, if I’m really hungry, I get a lot of satisfaction from first slice of pizza. Further, if I keep eating pizza, the satisfaction from the 8th slice would be much less than that of the first slice.


  • Firstly, Law of Demand comes from it,
  • Secondly, it is the basis of Consumption Expenditure, and,
  • Lastly, it forms the basis of Progressive Taxation.


  • Money,
  • Hobbies and Rare Things, and,
  • Liquor and Music.

Law of Equi-Marginal Utility

  • This law states that the consumer maximizing his total utility will allocate his income among various commodities in such a way that his marginal utility of the last rupee spent on each commodity is equal, or,
  • The consumer will spend his money income on different goods in such a way that marginal utility of each good is proportional to its price, or,
  • Under cardinal utility analysis a consumer maximizes his total utility by equalizing his marginal utility in relation to price in all the directions of his consumption or on each good and service purchased by him.
  • Example 1, Law of Equi-Marginal Utility – Utility Maximization with Scarcity.
    Now suppose we focus on how a consumer chooses when goods are not free the issue becomes one of maximizing utility subject to the constraint that your income is limited and prices are greater than zero. Suppose we now extend our analysis to the consumption of two goods: pizza and video rentals. Suppose we have the following information:
    The price of pizza is $8
    The rental price of a movie video is $4
    After tax income equals $40 per week

Limitations of Law of Equi-Marginal Utility

  • It is difficult for the consumer to know the marginal utilities from different commodities because utility cannot be measured.
  • Consumer are ignorant and therefore are not in a position to arrive at an equilibrium.
  • It does not apply to indivisible and inexpensive commodity.

Ordinal vs Cardinal Rankings

Ordinal Ranking: Gives us information on how a consumer ranks different baskets of goods. But it does not say by how much (i.e. 2 times as much).

Cardinal Rankings: Give us information on the intensity of the consumer preferences (i.e. they like basket A 10 times more than basket B).
Would be hard to say I like eating pizza out 10.5 times more than eating bad Chinese. Putting an exact number to our preferences is hard! – This is why we use ordinal rankings for consumer preferences.

For this purpose, take an example of Students taking an exam. After the exam, the students are ranked according to their performance. An ordinal ranking lists the students in order of their performance (i.e., Harry did best, Joe did second best, Betty did third best, and so on). A cardinal ranking gives the grade of the exam, based on an absolute grading standard (i.e., Harry got 50, Joe got 100, so Joe did 2 times better than Harry).

 Theory of Demand

Demand refers to the quantity of the commodity which a consumer is willing to buy at a particular price. Further, it refers for a particular period of time. Alternatively, demand is the quantity that consumers demand at alternative prices during a given period time. On the other hand, quantity demand refers to the particular quantity which buyers are willing and able to buy on a given price, on a given time.

For example, a consumer demands 2 kg of wheat in a month at a price of Rs. 20 per kg. Therefore, this is a complete example of demand for a commodity as it has all the three components of demand – quantity, price, and time. Further, the main features of Demand are as follows –

  • Firstly, the consumers are rational, and, demands only those commodities which provide utility.
  • Secondly, demand always mean effective demand. For this purpose, demand for a commodity or the desire to own a commodity should always get the support by purchasing power, and willingness to spend.
  • Thirdly, demand is a flow concept, i.e. so much per unit of time.
  • Lastly, demand is a desired quantity. Further, it shows consumer’s need and/or want to buy the commodity.

Factors determining Demand and Demand Function

To begin with, in economics, Demand is a multi-variate relationship, i.e. it is determined by many factors simultaneously. Mainly, it is influenced by individual demand. Furthermore, variants of the individual demand includes –

  • Demand for the Commodity,
  • Price of Commodity,
  • Prize of other good,
  • Consumers’ income, and,
  • Consumers’ taste and preferences.

Demand Function: The relation between the consumers’ optimal choice of the quantity of a good. Further, it also includes the quantity of a good, and its price is called the demand function.

Assumptions of the Law of Demand:

  • Firstly, the price of the related goods remains the same.
  • Secondly, the income of the consumers remains unchanged.
  • Thirdly, tastes and preferences of the consumers remain the same.
  • Fourthly, all the units of the goods are homogeneous.
  • Lastly, commodity should be a normal good.

Demand and Price

Definition: There’s a definite inverse relationship between the price of the good, and the quantity demanded of that good. Symbolically,

q = Quantity

P = Price of the good

Further, other factors constant, the relationship between price, and quantity demanded of a good is called the law of demand.

Exceptions to the Law of Demand

For the situations below, the law of demand has a direct relationship between the price and the quantity demanded.

  • Firstly, there are Giffen goods which necessarily are an inferior good with very high income elasticity of demand. Further, they have a very high income elasticity of demand. For this purpose, examples include jowar and bajra. In such case the demand curve is upward sloping.
  • Secondly, for Veblen goods also, demand curve goes upwards. In fact, Diamonds and another precious stones are all status goods. Moreover, higher the price, more the demand for them.
  • Thirdly, in cases of emergencies like war, drought, curfew or famine – the law of demand is not applicable.
  • Fourthly, it is also in case of Expectation of price rise in future. If the price rises, and the buyer expects further rise in price then it causes increase in the quantity bought.
  • Lastly, in the demonstration effect, the case is the same. As, sometimes a section of the society tries to imitate the higher income groups. Therefore, in such cases, the demand gets violated.

Elasticity of Demand

So to speak, price Elasticity of demand measures the responsiveness of demand of a good to a change in its price. Further, Alfred Marshall was the first economist to formulate this concept. To begin with, price elasticity of demand is the ratio of a relative change in quantity demanded to a relative change in price. Therefore, a relative measure is needed so that we can compare the changes in different measures. The percentage changes are independent of units. Numerically, price elasticity of demand eD , is calculated as –

eD = -percentage change in quantity demanded/ percentage change in price

eD  = – {change in quantity demanded/original quantity demanded} / {change in price/original price}

= – {(Q1 – Q)/ Q} / (P1 – P)/P

= {Delta change in Q/ Delta change in Price} * P/Q


Delta Q = Change in quantity demanded (or Q1 – Q)

Quantity = Original Quantity demanded

Delta P = Change in price (or P1 – P)

P = Original Price

eD = Coefficient of elasticity of demand. eD is negative. The ratio is a negative number because price and quantity demanded are inversely related. In numerical sums, the minus sign drops from the numbers and all percentage changes are treated as positive.

Factors affecting Elasticity of Demand

1) Income of the Consumers:

  • To begin with, if the income level of consumers is high, the elasticity of demand is less.
  • It is because, change in price will not affect the quantity demanded is by a greater proportion.
  • Besides that, in low income groups, the elasticity of demand is high.

2) Availability of close substitutes:

  • A good having closing substitutes will have an elastic demand.
  • Further, the goods with no close substitutes will have an elastic demand.
  • For example, Commodities such as tea, car, etc., have close substitutes.

3) Luxuries versus Necessities:

  • The price elasticity of demand is likely to be low for necessities, and high for luxuries.
  • In general, necessity is a good or service that consumer must have such as food (milk, bread), and medicines.
  • Alternatively, luxuries are goods that are enjoyable, but are not essential. For example, travelling by airways, having vacation at in a luxurious villa, etc.

4) Proportion of Total Expenditure spent on the product:

  • Higher the cost of the good, relative to total income of the consumer, more will be the price elasticity of demand.
  • Further, if the price of bread, salt, sugar, etc. which is relatively low, doubles, it would have atleast no effect on the quantity demanded on them.

5) Number of uses of the commodity

  • For this purpose, the more the number of uses a commodity can be put to, the more elastic is the demand.

6) Time period:

  • To this end, if the time period needed to find substitutes of the commodity is more, the price elasticity of demand is less, and vice versa.

Relationship between Elasticity, and, change in Expenditure on a good:

  • Firstly, when the quantity demanded rises in a greater proportion, and, the price falls. Then, we see the total expenditure increases. Hence, it is a situation when there’s an Elastic demand eD > 1.
  • Secondly, when quantity demanded rises in the same. To this end, the expenditure remains constant, and the price falls. Thus, the elasticity is  eD = 1.
  • Lastly, for the quantity demanded if the expenditure falls. Besides that, if the price falls, it is an elastic demand is eD  < 1.

Different values of Elasticity of demand

  • When eD  = 0, this occurs when to the percentage change in the price, there’s no change in quantity demanded. Therefore, it is called a perfectly inelastic demand. For example, essentials like lifesaving drugs.
  • When, 0< eD  <1, this happens when to a percentage change in price there is less than proportionate change in the quantity. Thus, this is called Inelastic or unitary elastic demand. For example, the necessities like fuels, food, etc.
  • When, eD = 1, this occurs when to a percentage change in price there’s equal change in quantity demanded. In general, this is more for the normal goods.
  • When, 1 < eD < infinity, this happens when a percentage change in price, there’s more than proportionate change in quantity demanded. For example, luxuries like eating in a 4 star hotel. Thus it is called an Elastic demand.
  • When, eD = infinity. This happens when there’s an infinite change in quantity demanded without any change in price. Thus, the situation is called a perfectly elastic demand. Besides that, this situation is imaginary, it exists in perfectly competition market.

The Production Function

A production function defines the relationship between inputs and the maximum amount to produce within a given time period with a given technology. Further, it reflects what should be. Moreover, it defines –

  • Firstly, the relationship between inputs and the maximum amount that can be produced.
  • Secondly, within a given period of time, and,
  • Lastly, with a given level of technology.

Mathematically, the production function can be expressed as

Q=f(K, L)


Q is the level of output

K = units of capital

L = units of labour

f( ) represents the production technology

More facts

  • Firstly, when discussing production, it is important to distinguish between two time frames.
  • Secondly, the short-run production function describes the maximum quantity of good or service that can be produced by a set of inputs, assuming that at least one of the inputs is fixed at some level.
  • Thirdly, the long-run production function describes the maximum quantity of good or service that can be produced by a set of inputs, assuming that the firm is free to adjust the level of all inputs
  • When discussing production in the short run, three definitions are important – a) Total Product b) Marginal Product c) Average Product.

Production in the Short Run

  • Firstly, Total product (TP) is another name for output in the short run.
  • Secondly, the marginal product (MP) of a variable input is the change in output (or TP) resulting from a one unit change in the input.
  • Thirdly, MP tells us how output changes as we change the level of the input by one unit.
  • Fourthly, the average product (AP) of an input is the total product divided by the level of the input.
  • Fifthly, AP tells us, on average, how many units of output produced per unit of input used.
  • Sixthly, Consider the two input production function Q=f(X,Y) in which input X is variable and input Y is fixed at some level.
  • Finally, the marginal product of input X, we define it as holding input Y constant.

MPx = Change in Q/ Change in X

  • The average product of input X, we define it as, holding Y input constant.

APx = Q/X

  • Rewriting this row, we can create the following table and calculate values of marginal and average product.

The Graphical representation as below –

The Law of Diminishing Returns

To begin with, the definition is – as additional units of a variable input are combined with a fixed input, at some point the additional output (i.e., marginal product) starts to diminish.

For example, Production: sorting refillable glass bottles, Fixed input: machinery and working area, Variable input: people working as sorters. Further, the figure below, depicts the same.

The Three Stages of Production

  1. Stage I:
  • Fixed input grossly underutilized.
  • We use, specialization and teamwork cause AP to increase when additional X.
  1. Stage II:
  • We use, Specialization and teamwork continue to result in greater output when additional X.
  • We utilize, Fixed input is being properly.
  1. Stage III:
  • We reach the Fixed input capacity.
  • Additional X causes output to fall.

The below Graph, depicts the analysis, and gives summary for the three stages of production:

  • Rational Producer will not produce n Stage 1 & 3.
  • Stage -1 : Marginal Product of fixed factor is negative.  Producer will not be making best use of fixed factor.
  • Stage-3 : Marginal Product of variable factor being negative.
  • The stage 2 represents the range of rational production decision.

Production in the Long Run

  • Firstly, if all inputs into the production process are doubled, three things can happen.
  • Secondly, output can be more than double, then there’s Increasing returns to scale (IRTS),
  • Thirdly, if the output can exactly double, then there are Constant returns to scale (CRTS),
  • Lastly, there are output can be less than double, then, there’s Decreasing returns to scale (DRTS).

Returns to Scale

  • Increasing returns to scale are observed when % D in inputs < % D in Q.
  • Decreasing returns to scale are observed when % D in inputs > % D in Q
  • Constant returns to scale are observed when % D in inputs = % D in Q

One way to measure returns to scale is to use a coefficient of output elasticity:

  • Firstly, If E>1 then IRTS, or
  • Secondly, it’s equal to 1, then CRTS, or
  • Lastly, if it’s greater than 1, then DRTS.

Price Elasticity of Supply

  • Price elasticity of supply measures how much Qs responds to a change in P.
  • Loosely speaking, it measures sellers’ price-sensitivity.
  • Again, use the midpoint method to compute the percentage changes. Price elasticity of supply = Percentage change in Qs/ Percentage change in P
  • Example: Price elasticity of supply equals16%/8%  = 2.0

There are Variety of Supply Curves. Further, the slope of the supply curve is closely related to price elasticity of supply. Moreover, the rule of thumb, the flatter the curve, the bigger the elasticity. Furthermore, the steeper the curve, the smaller the elasticity, five different classifications are –

Perfectly inelastic:

Price elasticity of supply

= % change in Q / % change in P

  • S curve in this case is a vertical line. It is the supply curve.
  • Sellers’ price sensitivity – none.
  • Elasticity: 0


  • S curve: relatively steep
  • Sellers’ price sensitivity: relatively low
  • Elasticity: < 1
  • Price elasticity of supply = % change in Q / % change in P = < 10% / 10% < 1.

Unit elastic:

  • Price elasticity of supply = % change in Q / % change in P = 10%/ 10% = 1
  • S curve: intermediate slope
  • Sellers’ price sensitivity: intermediate
  • Elasticity:= 1


  • Price elasticity of supply = % change in Q / % change in P = >10% / 10%
  • S curve: relatively flat
  • Sellers’ price sensitivity, is relatively high.
  • Elasticity > 1

Perfectly elastic

  • Price elasticity of supply = % change in Q / % change in P = any % / 0% = infinity
  • S curve is horizontal.
  • Sellers’ price sensitivity, extreme.
  • Elasticity: infinity

The Determinants of Supply Elasticity

  • The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.
  • Example: Supply of beachfront property is harder to vary and thus less elastic than
    supply of new cars.
  • For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market.

Other Elasticities:

Cross-price elasticity of demand:  Measures the response of demand for one good to changes in the price of another good.

  • Cross-price elasticity of demand = % change in Qd  for good 1 / % change in price of good 2
  • For substitutes, cross-price elasticity > 0
    (e.g., an increase in price of coffee causes an increase in demand for tea)
  • For complements, cross-price elasticity < 0
    (e.g., an increase in price of computers causes decrease in demand for software).

Other Elasticities

Income elasticity of demand:

  • It measures the response of Qd to a change in consumer income
  • Income elasticity of demand = Percent change in Qd / Percent change in income
  • Recall from Chapter 4:  An increase in income causes an increase in demand for a normal good.
  • Hence, for normal goods, income elasticity > 0.
  • For inferior goods, income elasticity < 0.
  • Thus, the income elasticity of demand measures how much quantity demanded responds to changes in buyers’ incomes.

Cross-price elasticity of demand:

  • It measures the response of demand for one good to changes in the price of another good.
  • Cross-price elasticity of demand = % change in Qd  for good 1/ % change in price of good 2
  • For substitutes, cross-price elasticity > 0
    (e.g., an increase in price of tea causes an increase in demand for coffee )
  • For complements, cross-price elasticity < 0
    (e.g., an increase in price of computers causes decrease in demand for software).
  • Thus, cross-price elasticity of demand measures how much demand for one good responds to changes in the price of another good.

The Market Forces of Supply and Demand

  • A group of buyers and sellers of a particular good or service,
  • Can be highly organized. For example, agricultural commodities.
  • Can be less organized. For example, ice cream.
  • They define Market as a complex set of activities by which potential buyers, and potential sellers are brought in close contact.  In order, to purchase and sale a commodity.
  • Competitive market includes – Many buyers and many sellers, and, each has a negligible impact on market price. Perfectly competitive market

Further, there are different type of market structures. Those are listed as below:

Perfectly competitive market

  • Goods offered for sale – exactly the same. Further, Buyers and sellers – numerous.
  • No single buyer or seller has any influence over the market price.
  • Must accept the price determined on the market –Price takers.
  • At the market price. Moreover, Buyers – buy all they want. Further, Sellers – sell all they want.
  • Monopoly – The only seller in the market, Sets the price.
  • Quantity demanded – Amount of a good, Buyers are willing and able to purchase
  • Law of demand – Other things equal, Further, when the price of the good rises, quantity demanded of a good falls.


To begin with, ‘Mono’ means ‘one’ and ‘poly’ means seller. The only seller in the market. Further, he sets the price. Moreover, it’s a market structure in which there’s a single firm producing all the output. For example, State has the monopoly in providing water supply, railways, etc.

Features of a Monopoly

  • Firstly, there’s a single firm.
  • Secondly, there are no close substitutes.
  • Thirdly, there are barriers to the entry.
  • Fourthly, there’s a perfect knowledge.

Monopolistic Competition

They define monopolistic competition as a market structure in which there are many firms selling closely related, but unidentical commodities. For example, detergents, automobiles, textiles, TV sets, etc.

Features of Monopolistic competition

  • Firstly, there are large number of buyers and sellers.
  • Secondly, there’s product differentiation.
  • Thirdly, there’s free entry or exit of firms.
  • Fourthly, there’s an imperfect knowledge.
  • Fifthly, there’s a selling cost.
  • Lastly, high transportation cost.


We define, oligopoly as a market structure in which there are few sellers of the commodity. Further, if there are two sellers, it is called duopoly. For example, automobiles, water pump, manufacturing, etc. Features of this market is as follows –

  • Firstly, there are few dominant firms.
  • Secondly, there is a mutual interdependence.
  • Thirdly, there are barriers to entry
  • Fourthly, there are homogeneous or differentiated products.
  • Fifthly, we cannot define the demand curve.
  • Lastly, there’s a price rigidity.

Macro economics

Macro Economics is a separate branch of economics, emerged after the British economist John Maynard Keynes. Further, the book name is – The General Theory of Employment. Besides that, there are two schools of thought which have given shape to Micro-economics –

  • Classical School, and Keynesian School of Thought.

Moreover, Macro-economics covers the below areas –

  • National Income and Related Aggregates:
  • Money and Banking,
  • Determination of Income and Employment,
  • Government Budget and the Economy, and,
  • Balance of Payments.

Syllabus of Economics (Economics Syllabus)

The below are the subjects which one needs for economics, covered in Economic syllabus.

Principles of Economics for Managers

  • Ten Principles of Economics
  • How People Make Decisions and Interact
  • Thinking like an Economist
    2. The Economist as Policy Adviser
    3. Why Economists Disagree
    4. The Basics of Business Forecasting

The Market Forces of Supply and Demand and Concept of Elasticity in
Business Decision

  • Markets and Competition
  •  Law of demand and supply
  • Elasticity and Its Application
  • Application of the concept of elasticity in business decision
  • Impact of regulations in the light of elasticity (Labor laws, Prohibited substance, etc.)

Consumer Demand Theory

  1. Cardinal utility analysis
  2. Total and marginal utility
  3. Law of diminishing marginal utility
  4. Law of Equi marginal utility
  5. Ordinal utility analysis
  6. Application of demand theory
  7. Hicks and Slutsky decomposition of price effect

Production Theory

  1. The Production function.
  2. a) Production with one variable input (Law of variable proportions)
    b) Production with two inputs (Isoquants)
    c) Returns to scale
    d) Economies of scale

Cost and Revenue Concepts: Maximizing Profits

1) Opportunity cost/Economic cost
2) Marginal and average cost
3)Fixed and variable cost
4) Short run and long run cost
5) TR, AR and MR : Revenue in Perfect Competition and Imperfect Competition
6) Equilibrium of the Firm: Maximizing Profits in Perfect Competition and Imperfect

Market Structure: Perfect competition, Monopoly, Monopolistic
Competition and Oligopoly

  • Introduction
  • Short and long run equilibrium
  • Social cost of monopoly
  • Price discrimination
  • Business strategy and game theory
  • Cartels and collision
  • Barriers to entry
  • Relevance to competition policy and I.P.R.

Macro-economics Policy and Practice

1) Basic Understanding of Macroeconomics
2) National Income and Circular Flow of Income
3) Monetary Policy versus Fiscal Policy
4) Fiscal and Monetary Policymakers try to stabilize the Economy
5) Debate: Whether the Central Bank should aim for zero Inflation?

Introduction and Interface: Law and Economics (Micro)

1) Evolution
2) Scope and manifestation
3) Effect of Legal Sanctions on Behaviour
4) Rationality analysis
5) Economics as a tool to measure efficiency of laws.
6) Market Failure
7) Pareto efficiency and Kaldor Hicks efficiency
8) Game theory
9) Nash Equilibrium
10) Prisoner’s Dilemma
11) Maximization of expected utility: Attitudes towards risk.
12) The Demand for Insurance, Supply of Insurance, Moral hazard, Adverse selection
13) Hicks’ theory of trade cycle

An introduction to Law and Economic Development (Macro)

  • The Economic Future of the World
  • The Double Trust Dilemma of Development
  • Make or Take
  • The Property Principle for Innovation
  • Keeping What You Make–Property Law
  • Doing What You Say–Contracts
  • Giving Credit to Credit–Finance and Banking
  • Financing Secrets–Corporations
  • Hold or Fold–Financial Distress
  • Termites in the Foundation—Corruption
  • Poverty Is Dangerous–Accidents and Liability

Intellectual Property (IP)

  • To begin with, there’s Information Economics and IP,
  •  Besides that, there are Patents – Broad or narrow. It Pioneers the discovery versus developing applications),
  • Further, there are duration of Patents, balance between creativity and dissemination and maximization of net social benefit.

Online courses for Economics (Economics courses):

For this purpose, these are the best courses in Economics, globally. There are both bachelors, and masters programmes available for online courses in economics. Further, below are the top online economic courses.

Bachelor degree available in Economics – online courses:

1) Bachelor of International Business Administration (BBA) Economics and Management. Available at New European College – Munich Germany.

2) Online B.Sc. Economics, which is available at University of London, Holborn, United Kingdom.

3) American bachelor in international relations. Further, this course is available in Prague, Czech Republic.

4) Online Bachelor of Science in Economics. This is available at Key West University, Jacksonville, USA.

5) Online Bachelor of Science in Business administration. It is available at North Dakota State University, Fargo, USA.

6) Bachelor in economics and Business Management. One may access it from International Telematic University from Rome, Italy.

7) Bachelor in economics and banking – curriculum economics and banking. You can fetch it from University of Siena, Italy.

8) BBA in economics. Further, Mind Development Academy, Cape Town, Africa.

9) Bachelor of science in business management, from Pacific college, Ontario, USA.

10) Bachelor in health economics (BA), from Apollon Hochschule, Germany.

11) Bachelor of Science in economics, from FernUni Schweiz, Switzerland.

12) Bachelor’s degree in Business and Economics, from eCampus University, Milan, Italy.

13) Online BSc Economics and Management, from University of London, Holborn, United Kingdom.

14) Online BSc Mathematics and Economics, from University of London, Holborn, United Kingdom.

15) Bachelor in Economics and Business – Curriculum Economics and Management, University of Siena, Italy.

Master degree available in Economics – online courses:

  1. Master Management in Finance and Accounting. You can apply it from IU International University of Applied Sciences – Online, from bad honnef, Germany.
  2. Master’s degree in International and Community taxation. Further, it is available at Universidade Santiago de Compostela, Spain.
  3. Master of Arts in Economics. Available at American University, Washington, USA.
  4. Master of Economics, from Atlantic international University Masters program, Honolulu, USA.
  5. Master of Science in Quantitative economics, from California Lutheran University, Thousand Oaks, USA.
  6. MSc in Sport Business, Management and Policy. It is available at Manchester Metropolitan University Online, United Kingdom.
  7. Master of Science in Organizational Management – Entrepreneurial and Economic Development. You can apply it from Peru State College, USA.
  8. Master in International Cooperation, Finance and Development, from Unitelma Sapienza, Rome, Italy.
  9. MSc Finance (Economic Policy). Further, you can apply it from SOAS University of London, United Kingdom.
  10. MSc in Applied Economics, from Georgia Southern University, Statesboro, USA.
  11. MSc (Applied Economics), from Johns Hopkins University, Advanced Academic Programs, Washington, USA.
  12. Master in applied economics. Further, you can apply it from Universidad Austral, Rosario, Argentina
  13. Online MSc in Applied Economics (Banking and Financial Markets), from University of Bath, United Kingdom.
  14. Master of Economics from Mind Development Academy, Cape Town, Africa.
  15. Master of Science Degree in Economics, Management and Innovation, from Unitelma Sapienza, Rome, Italy.
  16. MSc. Global Corporations and Policy, from SOAS University of London, United Kingdom.
  17. Master in Health economics (MA), from Apollon Hochschule, Germany.
  18. Master in Health economic studies (mahe), Apollon Hochschule, Germany.

PhD available in Economics – online courses:

  1. Doctor of Philosophy (Ph.D.) in Economics and Finance. It is available in Selinus University of Science and Literature, London, United Kingdom.
  2. Doctorate in Finance. You can avail it from Honolulu, USA.
  3. Online Doctor of Philosophy (PhD), from Global Humanistic University, Curacao.
  4. PhD in Islamic Economics and Finance, from EUCLID University, Washington, USA.
  5. Online doctor of International Political Economy (DIPE), Pasadena, USA.
  6. Doctorate of Economics, from Mind Development Academy, Cape town, South Africa.
  7. PhD in Risk Assessment and Strategic Investment. You can apply it from OUS Royal Academy of Economics and Technology in Zurich, Switzerland.
  8. Doctorate in Economics from Atlantic International University. It is from Honolulu, USA.

Economics Salary (in economics field):

So to speak, there’s a myth that for the candidates who specialize in economics subjects – are only supposed to do research. Further, to pursue the PhD, lecturer in economics, and research sector. Alternatively, they can also apply for Corporate, Banking, and regulatory sector of an economy. Further, for that purpose, they should it pursue from a good and/or placement based Colleges and/or University. Further, according to a report, average economics salary is global salary of USD 70,500 per annum.

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List of Universities offering Economics
List of Universities