Contents EXPLORING ECONOMICS

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1 Contents About the authors I-5 Preface to second edition I-7 Chapter-heads I-9 Syllabus : Choice Based Credit System (CBCS) I-19 1 EXPLORING ECONOMICS 1.1 Why study economics? Meaning of economics Definition of economics Ten principles of economics Scope of economics Economic problem : scarcity and choice Central problems of an economy Production possibility frontier Circular flow of income Economic systems Working with graphs 31 CHAPTER IN BRIEF 31 REVIEW QUESTIONS 35 Annex 1.1 : Working with graphs 37 I-11

2 Contents I-12 2 DEMAND, SUPPLY AND MARKET EQUILIBRIUM I. Demand Analysis 2.1 Demand and want Demand and quantity demanded Demand function Determinants of demand Law of demand Why demand curve slopes downward Linear and non-linear demand curve Market demand Changes in demand Exceptions to the law of demand 62 II. Supply Analysis 2.11 What is supply? Supply and quantity supplied Supply function Law of supply Market supply schedule Changes in supply Factors determining supply 75 III. Market Equilibrium 2.18 Market equilibrium 80 CHAPTER IN BRIEF 88 FORMULAS TO REMEMBER 91 REVIEW QUESTIONS 92 Annex 2.1 : Classification of Goods on the basis of Income 95 3 ELASTICITY OF DEMAND AND SUPPLY I. Price elasticity of demand 3.1 Introduction Meaning 101

3 I-13 Contents 3.3 Sign of the elasticity estimate Problems in the concept of elasticity of demand Slope and price elasticity of demand Types of elasticity of demand Factors affecting price elasticity of demand Measuring price elasticity of demand Relationship between Revenue and price elasticity of demand 126 II. Elasticity of supply 3.10 Introduction Meaning Types of elasticity of supply 130 III. Applications of elasticity of demand and supply 3.13 Factors affecting elasticity of supply Enigma of sufficiency other applications 139 CHAPTER IN BRIEF 140 FORMULAS TO REMEMBER 143 REVIEW QUESTIONS INCOME AND CROSS ELASTICITY OF DEMAND I. Income elasticity of demand 4.1 Introduction to income elasticity Concept of income elasticity of demand Types of income elasticity of demand Importance of income elasticity of demand 153 II. cross elasticity of demand 4.5 Introduction to cross elasticity Concept of cross elasticity Types of cross elasticity of demand 156

4 Contents I Importance of cross elasticity of demand 157 CHAPTER IN BRIEF 158 FORMULAS TO REMEMBER 159 REVIEW QUESTIONS MARKET EQUILIBRIUM AND GOVERNMENT INTERVENTION 5.1 Re-visiting market mechanism Understanding government intervention Price ceiling and its application Price flooring and its application Impact of tax on economy 172 CHAPTER IN BRIEF 179 REVIEW QUESTIONS SURPLUSES, MARKET EFFICIENCY AND COST OF TAXATION 6.1 Introduction Meaning of consumer surplus Measuring consumer surplus Meaning of producer surplus Measuring producer surplus Market efficiency Market failure Costs of taxation 204 CHAPTER IN BRIEF 213 FORMULAS TO REMEMBER 215 REVIEW QUESTIONS ORDINAL APPROACH TO THE CONSUMER BEHAVIOUR 7.1 Basis of Indifference curve approach 217

5 I-15 Contents 7.2 Concept of indifference curve Marginal rate of substitution Assumptions of indifference curve Indifference map Properties of indifference curve Exceptional shapes of indifference curve Budget line Consumer s equilibrium 238 CHAPTER IN BRIEF 244 FORMULAS TO REMEMBER 245 REVIEW QUESTIONS APPLICATIONS OF INDIFFERENCE CURVES 8.1 Introduction Effect of change in price Derivation of demand curve Effect of change in income Substitution effect Decomposition of price effect Applications of indifference curve analysis 265 CHAPTER IN BRIEF 273 FORMULAS TO REMEMBER 274 REVIEW QUESTIONS THEORY OF PRODUCTION 9.1 Introduction Production function Short run production concepts Law of variable proportions Producer s behaviour in long run 282

6 Contents I Economies and diseconomies of scale 284 CHAPTER IN BRIEF 292 REVIEW QUESTIONS THEORY OF COST I. Short run 10.1 Introduction Alternative cost concepts Cost function Total fixed cost (TFC) Total variable cost (TVC) Total cost (TC) Average fixed cost (AFC) Average variable cost Average cost (AC) Marginal cost Relationship between different cost curves 312 II. long run Long run total cost curve Long run average cost curve Long run marginal cost curve Relationship between production and cost curves 322 CHAPTER IN BRIEF 323 FORMULAS TO REMEMBER 326 REVIEW QUESTIONS THEORY OF PERFECT COMPETITION 11.1 Introduction Definition and characteristics of perfect competition 332

7 I-17 Contents 11.3 perfect and pure competition Revenue curves under perfect competition Equilibrium under perfect competition Conditions of equilibrium Short run equilibrium of a firm: TR-TC method Short run equilibrium of a firm: MR-MC method Short run equilibrium of industry supply curve of industry Supply curve of Industry and time horizon Completely inelastic supply: A very short period short run equilibrium of industry and firm Long run equilibrium of industry and firm Long run supply curve and firm s equilibrium price determination in long run 358 CHAPTER IN BRIEF 359 FORMULAS TO REMEMBER 361 REVIEW QUESTIONS MONOPOLY 12.1 Defining monopoly Characteristics of monopoly Pure, simple and discriminatory monopoly Entry barriers under monopoly Revenue curves under monopoly Production and price decisions under monopoly Shifts in demand curve and absence of the supply curve Monopoly power and its measurement Monopoly vs. perfect competition Social costs of monopoly power Price discrimination 385

8 Contents I Public policy under monopoly 390 CHAPTER IN BRIEF 392 FORMULAS TO REMEMBER 394 REVIEW QUESTIONS FACTORS OF PRODUCTION 13.1 Introduction Measures of factor productivity Modern theory of distribution Factor demand curve : labour Factor supply Determination of factor price Supply of land Supply of capital Equilibrium 410 CHAPTER IN BRIEF 411 FORMULAS TO REMEMBER 412 REVIEW QUESTIONS 412 Delhi University Paper Delhi University Paper