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The demand shift produces a shortage of bread at the old price. Inflation has both positive and negative effects on an economy. These data show that at an apples' price of Rupees per box, no apples will be produced at all. In both panel a and panel b , the quantity goes up. A boom is followed by depression and the depression again is followed by boom. The LM curve tells us what the various rates of interest will be given the quantity of money and the family of liquidity preference curves at different levels of income.
A society must determine who will do the production, with what resources, and what production techniques they will use. Who farms and who teaches? Is electricity generated from oil, from coal or from the sun? Will factories be run by people or robots'? For whom are goods produced'? Who gets to eat the fruit of economic activity? Is the distribution of income and wealth fair and equitable?
How is the national product divided. Are many people poor and a few rich? Do high incomes go to teachers or athletes or auto workers or venture capitalists?
Will society provide minimal consumption to the poor or must people work if they are to eat'? Different societies are organized through alternative economic systems and Economics studies the various mechanisms that a society can use to allocate its scarce resources. We generally distinguish two fundamentally different ways of organizing an economy. At one extreme, government makes most economic decisions, with people on top of the hierarchy giving economic commands to those further down the ladder.
At the other extreme, decisions are made in markets, where individuals or enterprises voluntarily agree to exchange goods and services, usually through payments of money. Let us briefly examine each of these two forms of economic organization. Hence, their economic systems are called market economies. A market economy is one in which individuals and private firms make the major decisions about production and consumption. A system of prices, of markets, of profits and losses, of incentives and rewards determines what, how, and for whom.
Firms produce the commodities that yield the highest profits the what by the techniques of production that are least costly the how. Consumption is determined by individuals' decisions about how to spend the wages and property incomes, generated by their labour and property ownership for whom. The extreme case of a market economy, in which the government does not interface in economic decisions, is called a 'laissez-faire' economy. In a command economy, such as the one which operated in the Soviet Union during most of the twentieth century, the government owns most of the means of production land and capital ; it also owns and directs the operations of enterprises in most industries; it is the employer of most workers and tells them how to do their jobs; and it decides how the output of the society is to be divided among different goods and services.
In short, in a command economy, the government addresses major economic questions by virtue of its ownership of resources and its power to enforce decisions. Mixed Economy No contemporary society or economy falls completely into either of these extreme categories.
Rather, all societies are mixed economies, with elements of both market and command economies. There has never been a per cent market economy although nineteenth-century England came close. Today most decisions in the United States are made in the marketplace. But the government plays an important role in overseeing the functioning of the market; government passes laws that regulate economic life, produce goods and services, and control pollution. India, right from the beginning of its economic planning, has been a mixed economy where public sector, private sector and joint sector coexist and complement each other.
Adam Smith defined Economics as a:. The choices are: Study of welfare 2. Study of 'means' and 'ends' 3. Study of Wealth 4.
None of these Right Answer: Macroeconomics deals with; The choices are: Question 3. Who is considered as the founder of the field of Microeconomics? Alfred Marshall Right Answer: Microeconomics is concerned with the behaviour of The choices are: Question 5. Ends refer to The choices are: A market economy is one The choices are: Question 7. India is a The choices are:.
Laissez-faire economy is The choices are: Market economy is also known as The choices are: Which of the following is Capitalistic Economy? Economics is the science that deals with the production, allocation, and use of goods and services.
Economics is 'the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Microeconomics is concerned with the behaviour of individual entities such as markets, firms, and households.
Macroeconomics views the performance of the economy as a whole. Every society must answer three fundamental questions: What kinds and quantities are produced among the wide range of all possible goods and services?
How are resources used in producing these goods? And for whom are the goods produced that is, what is the distribution of income and consumption among different individuals and classes?
In command economy, the government addresses the major economic questions by virtue of its ownership of resources and its power to enforce decisions.
Rather, all societies are mixed economies, with elements drawn from market and command economies. Concepts of Demand and Supply 2. Supply Schedule, Supply Curve 4. Equilibrium of Supply and Demand 5. Price Mechanism. Yet, as with weather forecasting, a careful study of markets will reveal certain forces underlying the apparently random movements.
To forecast prices and outputs in individual markets, you must first understand the concept of supply and demand. Economics has a powerful tool for explaining such changes in the economic environment.
It is called the theory of supply and demand. This theory shows how consumer preferences determine consumer demand for commodities, while business costs determine the supply of commodities. The increase in the price of petrol occurred either because the demand for petrol had increased or because the supply of crude oil had decreased.
The same is true for every market, from food to diamonds to land: If you understand how supply and demand works, you have gone a long way toward understanding a market economy. This chapter introduces the notions of supply and demand and shows how they operate in competitive markets for individual commodities. We begin with demand curves and then discuss supply curves.
Using these basic tools, we will see how the market price is determined where these two curves intersect where the forces of. It is the movement of prices the price mechanism which brings supply and demand into balance or equilibrium. This chapter deals with some examples of how supply-and-demand analysis can be applied.
The higher the price of an article, other things held constant; fewer the units consumers are willing to buy. The lower is its market price; the more units of it are bought. There exists a definite relationship between the market price of a good and the quantity demanded of that good, other things held constant. This relationship that exists between price and quantity bought is called the demand schedule, or the demand curve. Let us look at a simple example.
Table 2. At each price, we can determine the quantity of apples that consumers purchase. For example, at Rs. At a lower price, more apples are bought. Thus, at a price of Rs. At yet a lower price P equal to Rs. We can observe that the quantity demanded increases with the fall in price as shown in Table 2. TABLE 2. At each market price, consumers will want to buy a certain quantity of apples. As the price of apples falls, the quantity of apples demanded will rise. The Demand Curve The graphical representation of the demand schedule is the demand curve.
We show the demand curve in Fig. Note that quantity and price are inversely related; that is, Q goes up when P goes down.
The curve slopes downward, going from northwest to southeast. This important property is called the law of downward-sloping demand. It is based on common sense as well as economic theory and has been empirically tested and verified for practically all commodities apples, petrol, computers etc. Law of downward-sloping demand: When the price of a commodity is raised and other things being constant , buyers tend to buy less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases.
Quantity demanded tends to fall as price rises for two reasons. First is the substitution effect. For instance, when the price of a particular good rises, I will substitute other similar goods for it as the price of mutton rises, I eat more chicken. Second is the income effect. This comes into play when a higher price reduces quantity demanded.
Because when price goes up, I find myself somewhat poorer than I was before. If petrol prices double, I have in effect less real income, so I will naturally curb my consumption of petrol and other goods. Market Demand Our discussion of demand has so far referred to 'the' demand curve. But whose demand is it? The fundamental building block for demand is individual preferences. However, in this chapter we will focus on the market demand, which represents the sum total of all individual demands.
The market demand is what is observable in the real world. The market demand curve is found by adding together the quantities demanded by all individuals at each price. Does the market demand curve obey the law of downward - sloping demand? It certainly does. If prices drop, for example, the lower prices attract new customers through the substitution effect.
In addition, a price reduction will induce extra purchases of goods by existing consumers through both the income and the substitution effects.
Conversely, a rise in the price of a good will cause some of us to buy less. A whole array of factors influences how much will be demanded at a given price: The average income of consumers is a key determinant of demand. As people's income rises, individuals tend to buy more of almost everything, even if prices do not change.
Automobile purchases tend to rise sharply with higher levels of income. The size, of the market - measured, say, by the population - clearly affects the market demand curve. Mumbai's 21 million people tend to buy 1. The prices and availability of related goods influence the demand for a commodity. A particularly important connection exists among substitute goods - ones that tend to perform the same function, such as apples and oatmeal, pens and pencils, small cars and large cars, or oil and natural gas.
Demand for good A tends to be low if the price of substitute product B is low. In addition to these objective elements, there is a set of subjective elements called tastes or preferences.
Tastes represent a variety of cultural and historical influences. They may reflect genuine psychological or physiological needs for liquids, love, or excitement.
And they may include artificially contrived cravings for cigarettes,. They may also contain a large element of tradition or religion eating beef is popular in America but taboo in India, while curried jellyfish is a delicacy in Japan but would make many Americans gag. Finally, special influences will affect the demand for particular goods. The demand for umbrellas is high in rainy Mumbai but low in sunny Delhi; the demand for air conditioners will rise in hot weather. In addition, expectations about future economic conditions, particularly prices, may have an important impact on demand.
Demand curves sit still only in textbooks. Why does the demand curve shift? Because influences other than the good's price change.
Let us work through an example of how a change in a non-price variable shifts the demand curve. We know that the average income of Indians rose sharply during the economic boom of Because there is a powerful income effect on the demand for automobiles, this means that the quantity of automobiles demanded at each price will rise.
For example, if average incomes rose by 10 per cent, the quantity demanded of a car at a price of Rs. This would be a shift in the demand curve because the increase in quantity demanded reflects factors other than the good's own price. The net effect of the changes in underlying influences is what we call an increase in demand.
An increase in the demand for automobiles is illustrated in Fig. Note that the shift means that more cars will be bought at every price. The supply side of a market typically involves the terms on which businesses produce and sell their products. The supply of tomatoes tells us the quantity of tomatoes that will be sold at each tomato price. More precisely, the supply schedule relates the quantity supplied of a good to its market price, other things being constant.
In considering supply, the other things that are held constant include input prices, prices of related goods and government policies. The supply schedule or supply curve for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things being constant.
The Supply Curve Table 2. These data show that at an apples' price of Rupees per box, no apples will be produced at all. At such a low price, apple cultivators might want to devote their resources to producing other types of products like cereals and pulses that earn them more profit than apples. As the price of apples increases, ever more apples will be produced. At ever-higher apples prices, cereal makers will find it profitable to add more workers and to buy more automated apples-stuffing machines and even more apples factories.
All these will increase the output of apples at the higher market prices. Figure 2. One important reason for the upward slope is 'the law of diminishing returns'. Edible oil will illustrate this important law. If society wants more edible oil, then additional labour will have to be added to the limited farm suitable for producing edible oil crops.
Each new worker will be adding less and of less extra product. The price needed to coax out additional edible oil output is therefore higher. By raising the price of edible oil, society can persuade edible oil producers to produce and sell more edible oil; the supply curve for edible oil therefore is upward-sloping.
Similar reasoning applies to other goods as well.
One major element underlying the supply curve is the cost of production. When production costs for a good are low relative to the market price, it is profitable for producers to supply a great deal. When production costs are high relative to price, firms produce little, switch over the production of other products, or may simply go out of business.
Production costs are primarily determined by the prices of inputs and. The prices of inputs such as labour, energy or machinery obviously have a very important influence on the cost of producing a given level of output.
For example, when petrol prices rose sharply in the s, the increase raised the price of energy for manufacturers, increased their production costs and lowered their supply.
By contrast, as computer prices fell over the last three decades, businesses increasingly substituted computerized processes for other inputs, for example, in payroll or accounting operations, this increased supply. An equally important determinant of production costs is technological advances, which consist of changes that lower the quantity of inputs needed to produce the same quantity of output. Such technological advances include everything from scientific breakthroughs to better application of existing technology or simply reorganization of the flow of work.
For example, manufacturers have become much more efficient over the last decade or so. It takes far fewer hours of labour to produce an automobile today than what it did just 10 years ago.
This advance enables car-makers to produce more automobiles at the same cost. But production costs are not the only ingredient that goes into the supply curve. Supply is also influenced by the prices of related goods, particularly goods that are alternative outputs of the production process.
If the price of one production substitute rises, the supply of another substitute will decrease. For example, auto companies typically make several different car models in the same factory. If there is more demand for one model, and its price rises, they will switch over more of their assembly lines to making that model, and the supply of the other models will fall.
Or if the demand and price for trucks rise, the entire factory can be converted to making trucks and the supply of cars will fall. Government policy also has an important influence on the supply curve. Environmental and health considerations determine what technologies can be used, while taxes and minimum-wage laws can significantly raise input prices.
In the local electricity market, government regulations influence both the number of firms that can compete and the prices they charge. Government trade policies have a major impact upon supply aspects. Finally, special factors affect the supply curve. The weather exerts an important influence on farming and on the agro- industry.
The computer industry has been marked by a keen spirit of innovation, which has led to a continuous flow of newer products. Market structure will affect supply, and expectations about future prices often have an important impact upon supply decisions.
What lies behind these changes in supply behaviour? When changes in factors other than a good's own price affect the quantity supplied, we call these changes as shifts in supply. Supply increases or decreases when the amount supplied increases or decreases at each market price. When automobile prices change, producers change their production and quantity supplied; however, the supply and the supply curve do not shift. By contrast, when other influences affecting supply change, supply changes and the supply curve shifts.
We can illustrate a shift in supply for the automobile market. Supply would increase if the introduction of cost-saving computerized design and manufacturing reduced the labour required to produce cars, if autoworkers took a pay cut, if there were lower production costs in Japan, or if the government repealed environmental regulations on the industry.
Any of these elements would increase the supply of automobiles in the country at each price. We know the amounts that are willingly bought and sold at each price. We have seen that consumers demand different amounts of apples, cars and computers as a function of these goods' prices. Similarly, producers willingly supply different amounts of these and other goods depending on their prices.
But how can we put both sides of the market together? The answer is that supply and demand interacts to produce equilibrium price and quantity or market equilibrium. The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell. The reason we call this equilibrium is that, when the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.
Let us work through the example of apples as given in Table 2. To find the market price and quantity, we find a price at which the amounts desired to be bought and sold just match. If we try a price of Rs. Clearly not. As row A in Table 2. The amount supplied at Rs. Because too few consumers are chasing too many apples, the price of apples will tend to fall, as shown in column 5 of Table 2.
Let us try at Rs. Does that price clear the market? A quick look at row D shows that at Rs. Apples begin to disappear from the stores at that price. As people scramble around to find their desired apples, they will tend to bid up the price of apples, as shown in column 5 of Table 2.
We could try other prices, but we can easily see that the equilibrium price is Rs. At Rs. Only at Rs. Market equilibrium comes at the price at which quantity demanded equals quantity supplied.
At that equilibrium, there is no tendency for the price to rise or fall.
The equilibrium price is also called the market-clearing price. This denotes that all supply and demand orders are filled, the books are 'cleared' of orders and demanders and suppliers are satisfied. Equilibrium with Supply and Demand Curves We often show the market equilibrium through a supply-and-demand diagram like the one in Fig.
This figure combines the supply curve from Fig. Combining the two graphs is possible because they are drawn with exactly the same units on each axis. We find the market equilibrium by looking for the price at which quantity demanded equals quantity supplied.
The equilibrium price comes at the intersection of the supply and demand curves, at point C. How do we know that the intersection of the supply and demand curves is the market equilibrium? Let us repeat our earlier experiment. Start with the initial high price of Rs. At that price, suppliers want to sell more than demanders want to buy.
The result is a surplus or excess of quantity supplied over quantity demanded, shown in the figure by the black line labeled 'Surplus. At a low price of Rs. We now see that the balance or equilibrium of supply and demand comes at point C, where the supply and demand curves intersect.
At point C, where the price is Rs. At point C, and only at point C, the forces of supply and demand are in balance and the price has settled at a sustainable level. The equilibrium price and quantity come where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection of the supply and demand curves.
There are no shortages or surpluses at the equilibrium price. It can also be used to predict the impact of changes in economic conditions on prices and quantities.
Let us change our example to the bread. Suppose that a spell of bad weather raises the price of wheat, a key ingredient of bread. That shifts the supply curve for bread to the left. This is illustrated in Fig.
In contrast, the demand curve has not shifted because people's sandwich demand is largely unaffected by farming weather. What happens in the bread market?
The harvest causes bakers to produce less bread at the old price, so quantity demanded exceeds quantity supplied. The price of bread therefore rises, encouraging production and thereby raising quantity supplied, while simultaneously discouraging consumption and lowering quantity demanded. The price continues to rise until, at the new equilibrium price, the amounts demanded and supplied are once again equal. As Fig. Thus a bad harvest or any leftward.
We can also use our supply-and-demand apparatus to examine how changes in demand affect the market equilibrium. Suppose that there is a sharp increase in family incomes, so everyone wants to eat more bread. This is represented in Fig. The demand curve thus shifts rightward from DD to D'D'. The demand shift produces a shortage of bread at the old price. A scramble for bread ensues, with long lines in the bakeries.
Prices are bid upward until supply and demand come back into balance at a higher price. Graphically, the increase in demand has changed the market equilibrium from E to E' in Fig. For both examples of shifts a shift in supply and a shift in demand a variable underlying the demand or supply curve has changed. In the case of supply, there might have been a change in technology or input prices.
For the demand shift, one of the influences affecting consumer demand incomes, population, and the prices of related goods or tastes changed and thereby shifted the demand schedule. Suppose that you go to the store and see that the price of bread has doubled. Does the increase in price mean that the demand for bread has risen or does it mean that bread has become more expensive to produce?
The correct answer is that without more information, you do not know it could be either one, or even both. Let us look at another example. If fewer airline tickets are sold, is the cause that airline fares have gone up or that demand for air travel has gone down?
Economists deal with these sorts of questions all the time: When prices or quantities change in a market, does the situation reflect a change on the supply side or the demand side?
Sometimes, in simple situations, looking at price and quantity. For example, a rise in the price of bread accompanied by a decrease in quantity suggests that the supply curve has shifted to the left a decrease in supply.
A rise in price accompanied by an increase in quantity indicates that the demand curve for bread has probably shifted to the right an increase in demand. This point is illustrated in Fig. In both panel a and panel b , the quantity goes up. But in a the price rises and in b the price falls.
Figure 8 a shows the case of an increase in demand or a shift in the demand curve. As a result of the shift, the equilibrium quantity demanded increases from 10 to 15 units. The case of a movement along the demand curve is shown in Fig. In this case, a supply shift changes the market equilibrium from point E to point E'.
As a result, the quantity demanded changes from 10 to 15 units. But demand does not change in this case; rather, quantity demanded increases as consumers move along their demand curve from E to E' in response to a price change.
Demand Schedule is the The choices are: Market Demand Curve obeys the The choices are: Forces behind the demand curve The choices are: A down ward Sloping Demand Curve relates quantity demanded to The choices are: Shifts in Supply means The choices are: Question 6. The Equilibrium Price is also know as The choices are:. Forces behind the Supply Curve The choices are: Supply curve relates quantity supplied to The Choices are: Market equilibrium comes at the price at which quantity demanded equals to quantity The choices are: Let Us Sum Up www.
There exists a definite relationship between the market price of a good and the demanded quantity of that good, other things being constant. This relationship between price and quantity bought is called the demand schedule, or the demand curve. When the price of a commodity is raised and other things are held constant buyers tend to buy less of the commodity.
When there are changes in factors other than a good's own price which affect the quantity purchased, we call these changes shifts in demand. Demand increases or decreases when the quantity demanded at each price increase or decrease. The supply schedule or supply curve for a commodity shows the relationship between its market, price and the amount of that commodity that producers are willing to produce and sell, other things held constant.
When the elements underlying demand or supply change, this leads to shifts in demand or supply and to changes in the market equilibrium of price and quantity. Definition and measures of money concept 2. Causes and measures of inflation.
Medium of Exchange;. A measure of value; 3. A store of value over time,; 4. Standard for deferred payments; Let us understand each of the above functions. Medium of Exchange: Individual goods and services, and other physical assets, are 'priced' in terms of money and are exchanged using money.
A Measure of Value: Money is used to measure and record the value of goods or services. A store of value over time: Money can be held over a period of time and used to finance future payments. Standard for Deferred Payments: Money is used as an agreed measure of future receipts and payments in contracts. Tell the Publisher! I'd like to read this book on Kindle Don't have a Kindle? Product details Paperback: Macmillan 22 November Language: English ISBN What other items do customers buy after viewing this item?
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Read reviews that mention good book caiib edition date exam. Top Reviews Most recent Top Reviews. There was a problem filtering reviews right now. Please try again later. Verified Purchase. Good book but it's of old edition It's better to go for free PDF files available on internet than reading this book to pass the exam. However if u wanna have vast knowledge abt the topic go for it. By the way I scored The content is not upto date. This is only a reprint of the 1st edition published in and the facts and figures are of no use module A.
Also the Indian economy has undergone lot of changes since So anyone reading this book will have to google side by side. IIBF should update contents. Other than that business maths and HRM are very good.
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