What is economics?

Economics is the branch of social science that studies the production,

exchange, distribution, and consumption of goods and services. In
general economics is a subject which deals with human behaviour .
Economics words comes from geek word ‘’ oikos and nemein’’ which
means ‘’management of households’’ .
1.“Economics is an enquiry into the nature and causes of wealth of
nations.”- Adam Smith.
2.Economics is the science which treats of wealth. “-J.B. Say.In the
above definition wealth becomes the main focus of the study of
Economics. The definition of Economics, as science of wealth, had some
merits.
3. ‘’Economics defined as welfare ‘’ – A. Marshall
The study of Economics as a ‘Science of Wealth’ has been criticized on
several grounds. The main criticisms leveled against this definition are;
• Wants—>efforts —>wealth —>satisfaction. ( Economics circle).
# Explore the Nature and Scope of Economics
Society is formed by civilised people who indulge in day-to-day
transactions. These transactions are based on cultural values, human
interactions and economic and financial decisions. Economics is the
language and theory of these interactions. It is concerned with the
consumption of goods and services that help regular functioning.
# Nature of Economics
It is divided into two fields with respect to nature – Science and Arts.
Though divided into these two fields, it is considered a part of both.
Economics as an Art
Art is a field that dwells on the means of expression and application of
any skills, whether creative, pragmatic, or emotional. Art exists all
around us, and it takes a great mind to appreciate art. Like any other art
form, economics requires a great deal of imagination; however, the
imagination has to be in the context of reality and cannot be a fleeting
idea.
Furthermore, economics is goal-oriented. It states the means to achieve
an end; similar is the case with arts. For instance, Arts tells us the ‘how
to’ part of anything. Economics also states theories that discuss the
‘how to’ part of an end goal. Therefore, arts and economics deal with
the practical application of book-based knowledge. Both bring life to
the theories.
Economics as a Science
Science determines the cause and effect relationship. It is quantifiable
and uses a proven apparatus to predict the desired results. It is based
on experimentation. Economics has all these qualities; it establishes a
strong cause and effect relationship for the consumption of goods and
services between demand and supply.
Moreover, it can be measured or quantified in graphs and charts and,
more importantly, money. It uses its own methods to forecast the end
result. Hence, economics is a science and can be of two types:
Positive: It is based on cause and effect relationship between variables
and lays down the facts.
Normative: It is based on value judgements and is to do with ‘how’
things should be.
Hence, economics as a science deals with the theory and the principles;
economics as an art deals with the application and execution.
# Scope of Economics
Scope refers to the extent to which something deals with or the extent
to which something is concerned. Consumption of goods and services is
the most basic way to define its scope. However, in reality, the scope of
economics is much more than the regular consumption of goods and
services.
Microeconomics
Greek words ‘’mikos’’ means ‘’small ‘’.
Micro refers to small; it is the study of individual units of consumption
of goods and services as well as that of production and much more. It is
concerned with one single household, office, industry or market.
Moreover, concepts such as product pricing and consumer or firm
behaviour are a part of it. Various types of markets are also studied
under this. Hence, the consumption of goods and services and the
behaviour responsible for it is a part of microeconomics.
It uses the bottom-up strategy to analyse the economy. In other words,
microeconomics tries to understand human’s choices and allocation of
resources. It does not decide what are the changes taking place in the
market, instead, it explains why there are changes happening in the
market.
The key role of microeconomics is to examine how a company could
maximise its production and capacity, so that it could lower the prices
and compete in its industry. A lot of microeconomics information can
be obtained from the financial statements.
The key factors of microeconomics are as follows:
 • Demand, supply, and equilibrium
• Production theory

• Costs of production

• Labour economics

Examples: Individual demand, and price of a product.

Macroeconomics
Greek word ‘’makos ‘’means’’ huge or large ‘’
Macro means large; it is the study of the overall production and
consumption of goods and services. It is concerned with national
income, GDP, GNP or gross national product. Concepts such as macro-
level business cycles, national budget, unemployment and money
supply are a part of macroeconomics.
Macroeconomics studies the association between various countries
regarding how the policies of one nation have an upshot on the other. It
circumscribes within its scope, analysing the success and failure of the
government strategies.
In macroeconomics, we normally survey the association of the nation’s
total manufacture and the degree of employment with certain features
like cost prices, wage rates, rates of interest, profits, etc., by
concentrating on a single imaginary good and what happens to it
The important concepts covered under macroeconomics are as follows:
• Capitalist nation
• Investment expenditure
• Revenue
Examples: Aggregate demand, and national income.
 #Problem of scarcity and choice of economics.
The fundamental problem in economics is the issue of scarcity and the
resulting necessity for individuals, businesses, and societies to make
choices. Scarcity refers to the condition where resources are limited
relative to the wants and needs of individuals. In other words, there are
not enough resources (such as time, money, labor, and raw materials) to
satisfy all the desires and requirements of people.
• Limited Resources: Resources, whether natural, human, or capital,
are limited. There are only so many hours in a day, a finite amount
of money, and a restricted amount of raw materials available.
• Unlimited Wants: Human wants and needs are virtually limitless.
People desire various goods and services to improve their well-
being and quality of life.
• Decision-Making: Individuals, firms, and governments must make
decisions on how to allocate their limited resources efficiently.
This decision-making process involves evaluating trade-offs and
considering the opportunity cost of each choice.
• Supply and Demand: The forces of supply and demand play a
crucial role in determining prices and resource allocation in
markets. Prices serve as signals that convey information about
scarcity, encouraging efficient resource allocation.
• Production Possibility Frontier (PPF): The PPF is a graphical
representation of the trade-offs a society faces due to scarcity. It
shows the maximum combinations of two goods that can be
produced given the available resources and technology.
• Public Policy: Policymakers grapple with scarcity when formulating
economic policies. They must prioritize among competing goals
and consider the distributional impacts of their decisions.
 #Central problems of economy.
The central problems of economics, often referred to as the
fundamental economic questions, revolve around the key issues that
arise due to the scarcity of resources and the need to make choices.
These central problems can be summarized by three fundamental
questions:
What to Produce?
This question pertains to the allocation of resources among different
goods and services. Societies must decide what combination of goods
and services to produce based on the preferences and needs of the
population. This decision involves considering the opportunity cost of
producing one good over another.
How to Produce?
Once the decision on what to produce is made, the next question is
how to produce those goods and services. This involves choosing the
most efficient and cost-effective methods of production. Decisions
about technology, labor, and capital allocation are essential in this
context.
For Whom to Produce?
This question addresses the distribution of goods and services among
the members of society. It involves decisions about how income and
wealth are distributed, and who gets to consume the produced goods
and services. Economic systems and policies influence the distributional
outcomes in a society.
These three central problems encapsulate the core challenges faced by
individuals, businesses, and governments as they navigate the limited
availability of resources and the unlimited wants and needs of society.
 # concept and types of demand.
Demand refers to the quantity of a good or service that consumers are
willing and able to purchase at various prices during a particular period.
Understanding the concept of demand is crucial for businesses,
policymakers, and economists as it influences production, pricing, and
resource allocation. There are different types of demand based on
various factors. Let’s explore the concept and types of demand:
Concept of Demand:
1. Willingness and Ability:* Demand involves both the willingness
and ability to purchase a product or service. Consumers must have
the desire for the product, and they must also possess the
financial means to buy it.
2. Relation with Price: Demand is inversely related to the price of a
product or service. Generally, as the price increases, the quantity
demanded decreases, and vice versa. This relationship is often
depicted on a graph as a demand curve.
3. Other Determinants: Besides price, other factors influence
demand, including consumer preferences, income levels, the
prices of related goods (substitutes and complements), and
external factors such as advertising, seasonality, and economic
conditions.
Types of Demand:
1. *Individual Demand: The quantity of a good or service that an
individual consumer is willing and able to buy at different prices.
Ex:- A person’s demand for a specific brand of smartphone.
2. Market Demand: The total quantity of a good or service that all
consumers in a market are willing and able to buy at different prices.
 Ex:- The total demand for smartphones in the entire market.
3. Derived Demand:- The demand for a factor of production (e.g., labor
or raw materials) that arises from the demand for the final product.
*Ex:- The demand for steel in the construction industry.
4. Composite Demand: - *Definition:* When a good has multiple uses
and the demand for one use can affect the overall demand.
*Ex:- Milk, which can be used to produce various dairy products like
butter, cheese, and yogurt.
6. Competitive Demand:- When two or more goods can be used to
satisfy the same want or need, and the increase in the demand for one
may reduce the demand for the other.
Ex:- Tea and coffee, as they are substitutes for each other.
7. Seasonal Demand:- Fluctuations in demand based on the time of the
year.
Ex- Demand for winter clothing during the colder months.
8. Elastic and Inelastic Demand:
*Elastic Demand: When the quantity demanded is highly responsive to
changes in price.
*Inelastic Demand: When the quantity demanded is not very
responsive to changes in price.
Understanding these different types of demand is essential for
businesses to make informed decisions regarding production levels,
pricing strategies, and resource allocation.
 #Determinants of individual demand /supply
Individual demand and supply are key concepts in microeconomics that
help explain how individuals make choices in the market. The
determinants of individual demand and supply are factors that
influence the quantity of a good or service that an individual is willing
and able to buy or sell at a given price.
..Determinants of Individual Demand:
1. **Price of the Good or Service (P):* - As the price of a good or
service increases, the quantity demanded generally decreases, and vice
versa. This relationship is captured by the law of demand.
2. **Income (Y):* - For most goods, an increase in income leads to an
increase in demand (normal goods). However, for inferior goods, an
increase in income may lead to a decrease in demand.
3. **Prices of Related Goods:** - Substitute Goods: If the price of a
substitute increases, the demand for the given good may increase.
- Complementary Goods: If the price of a complementary good
increases, the demand for the given good may decrease.
4. **Tastes and Preferences:** - Changes in consumer preferences
and tastes can significantly impact demand. This is subjective and can
be influenced by various factors such as advertising, trends, and cultural
shifts.
5. **Expectations:** - Expectations about future prices or changes in
income can influence current demand. For example, if consumers
expect prices to rise in the future, they may buy more now.
6. **Number of Buyers (Population):** - The overall size of the
market, determined by the number of potential buyers, can affect
demand. An increase in the population generally leads to an increase in
demand.
#Determinants of Individual Supply:
1. **Price of the Good or Service (P):** - The law of supply states that,
all else being equal, as the price of a good or service increases, the
quantity supplied increases, and vice versa.
2. **Input Prices:** - The cost of inputs (such as labor, raw materials,
and technology) can affect the cost of production. An increase in input
prices may decrease the quantity supplied.
3. **Technology:** - Advances in technology can increase the
efficiency of production, leading to an increase in supply.
4. **Expectations:* - Suppliers’ expectations about future prices or
changes in input costs can influence current supply. If they expect prices
to rise in the future, they may decrease current supply.
5. **Number of Sellers:**
- The overall size of the market, determined by the number of sellers,
can affect supply. An increase in the number of sellers can lead to an
increase in supply.
6. **Government Policies:** - Government regulations, taxes, and
subsidies can have a significant impact on supply by affecting
production costs.
Understanding these determinants is crucial for analyzing and
predicting changes in individual demand and supply in the market. Keep
in mind that these determinants can interact and vary depending on the
specific circumstances of each market.
 #Demand
Demand refers to the quantity of a good or service that consumers are
willing and able to purchase at various prices during a specific period. It
is a fundamental concept in economics and is influenced by a variety of
factors. The law of demand states that, all else being equal, as the price
of a good or service increases, the quantity demanded decreases, and
vice versa.

1.*Inverse Relationship with Price:* There is typically an inverse

relationship between the price of a good and the quantity demanded by
consumers. When prices rise, consumers generally demand less of a
good, and when prices fall, demand tends to increase.

2.*Other Determinants of Demand:* Apart from price, other factors

such as income, prices of related goods (substitutes and complements),
tastes and preferences, expectations, and the number of buyers can
influence demand.

3.*Demand Schedule and Demand Curve:* A demand schedule is a

table that shows the quantity of a good consumers are willing to buy at
different prices. A demand curve is a graphical representation of the
demand schedule, with price on the vertical axis and quantity on the
horizontal axis.
 # *Demand Function:
The demand function is a mathematical expression that represents the
relationship between the quantity demanded of a good and the factors
that determine demand. It shows how the quantity demanded changes
in response to changes in factors such as price, income, and others.
The general form of a demand function is often written as:
Qd = f ( P ,Y , Pr , T , N ) .
Where:
- Qd. is the quantity demanded.
- P is the price of the good.
- Y is the consumer’s income.
- Pr is the price of related goods
- T represents tastes and preferences.
- N is the number of buyers in the market.
Each of these variables can have a specific impact on the quantity
demanded. For example, an increase in income( Y ) may lead to an
increase in the quantity demanded for normal goods.
Understanding the demand function helps economists and businesses
analyze how changes in various factors affect the demand for a product
or service. Empirical estimation and analysis of demand functions are
common in econometrics and economic research to quantify these
relationships.
 # Theory of demand and law of demand § supply
The theory of demand and the laws of demand and supply are
foundational concepts in economics that help explain how markets
function, how prices are determined, and how goods and services are
allocated in an economy.
1. Theory of Demand: - The theory of demand is a fundamental
economic principle that describes the relationship between the price of
a good or service and the quantity demanded by consumers. It is based
on the assumption that other factors influencing demand remain
constant.
- Consumers make decisions about what to buy based on their
preferences, income, and the prices of goods and services. The theory
of demand helps in understanding how changes in these factors affect
the quantity demanded.
2. Law of Demand: - The law of demand is a specific aspect of the
theory of demand. It states that, all else being equal, as the price of a
good or service decreases, the quantity demanded increases, and as the
price increases, the quantity demanded decreases.
- This relationship is typically represented by a downward-sloping
demand curve. It reflects the idea that consumers are willing to buy
more of a good when its price is lower and less when its price is higher.
3. Theory of Supply:
- The theory of supply complements the theory of demand and
focuses on the behavior of producers. It explains how the quantity of a
good or service that producers are willing to supply is influenced by
factors such as the price of the good, production costs, and
technological advancements.
- Like the theory of demand, the theory of supply is based on certain
assumptions, including the ceteris paribus (all else being equal)
condition.
4. Law of Supply: - The law of supply states that, all else being equal, as
the price of a good or service increases, the quantity supplied by
producers also increases, and as the price decreases, the quantity
supplied decreases. This relationship is typically represented by an
upward-sloping supply curve.
- Producers are generally more willing to supply goods at higher prices
because higher prices can cover production costs and provide an
opportunity for profit.
5. Equilibrium: - The interaction between the demand and supply in a
market determines the equilibrium price and quantity. The equilibrium
is the point where the quantity demanded equals the quantity supplied.
At this point, there is no tendency for prices or quantities to change,
and the market is said to be in balance.
6. Market Forces: - Changes in demand or supply can lead to shifts in
the equilibrium price and quantity. For example, an increase in demand
or a decrease in supply tends to push prices up, while a decrease in
demand or an increase in supply tends to push prices down.
Understanding the theory of demand and supply is crucial for analyzing
market dynamics, predicting price changes, and formulating economic
policies. Together, these concepts provide a framework for
understanding how markets allocate resources in response to changing
conditions and preferences.
 # Exception of law of demand.
While the law of demand generally holds true in most situations, there
are certain circumstances or exceptions where the typical inverse
relationship between price and quantity demanded may not apply or
may be influenced by other factors. Some of the key exceptions or
qualifications to the law of demand include.
1. Veblen Goods: - Veblen goods are a type of goods for which demand
increases as the price rises. This phenomenon contradicts the law of
demand. The explanation lies in the conspicuous consumption
associated with these goods. Consumers may perceive higher prices as
a signal of higher quality or exclusivity, leading to an increase in
demand.
2. *Giffen Goods: - Giffen goods are another exception to the law of
demand. In the case of Giffen goods, an increase in the price of the
good leads to an increase in its quantity demanded. This is often
associated with goods that constitute a significant portion of a
consumer’s budget, and the income effect dominates the substitution
effect.
3. Necessities vs. Luxuries: - For some goods, especially necessities,
the demand may not be very responsive to price changes. In the case of
essential goods like certain medications or basic food items, consumers
may continue to buy them even if the price increases because these
goods are deemed indispensable.
4. Expectations of Future Price Changes: - If consumers anticipate that
the price of a good will rise in the future, they may increase their
current demand, even if the price is currently high. This expectation can
create a situation where the demand for a good increases with an
increase in its price, going against the usual law of demand.
5. Custom-Made or Unique Goods:
- Goods that are highly personalized, custom-made, or unique may
not follow the traditional law of demand. The demand for such goods
may not decrease significantly even if the price rises because there are
no perfect substitutes.
Additionally, these exceptions highlight the complexity of consumer
behavior and the various factors that can influence demand beyond just
changes in price.
# demand supply schedule
A demand and supply schedule is a tabular representation of the
quantities of a good or service that consumers are willing to buy
(demand) and producers are willing to sell (supply) at different prices.
These schedules are fundamental tools in economics for understanding
market dynamics and are often used to create demand and supply
curves. Here’s a simple explanation of each schedule:
1. **Demand Schedule:**
- A demand schedule lists the various quantities of a good or service
that consumers are willing to purchase at different prices, assuming
other factors remain constant.
- Typically, the demand schedule is presented in a table format, with
two columns: one for prices and another for corresponding quantities
demanded.
- For example: Price ($) | Quantity Demanded
-----------|------------------
5 | 100
4 | 150
 3 | 200
. 2 | 250
-This hypothetical demand schedule suggests that as the price of the
good decreases, the quantity demanded tends to increase.
2. **Supply Schedule:** - A supply schedule, on the other hand, lists
the quantities of a good or service that producers are willing to offer for
sale at different prices, assuming other factors remain constant.
- Like the demand schedule, the supply schedule is presented in a
table format, typically with two columns: one for prices and another for
corresponding quantities supplied.
- For example: Price ($) | Quantity Supplied
-----------|------------------
1 | 100
2 | 150
3 | 200
4 | 250
5 | 300
-This hypothetical supply schedule suggests that as the price of the
good increases, the quantity supplied tends to increase.
When plotted on a graph, the demand and supply curves intersect at
the equilibrium point, where the quantity demanded equals the
quantity supplied, determining the market price and quantity.
Understanding demand and supply schedules is essential for analyzing
market behavior, predicting the effects of changes in price or other
factors, and making informed decisions about economic policies or
business strategies.
# Demand supply curve
Demand and supply curves are graphical representations of the
relationship between the price of a good or service and the quantity
demanded by consumers and the quantity supplied by producers,
respectively.
1. **Demand Curve:** - A demand curve is a graphical representation
of the relationship between the price of a good or service and the
quantity demanded by consumers, assuming other factors remain
constant.
- The demand curve typically slopes downward from left to right,
indicating the inverse relationship between price and quantity
demanded. This means that as the price decreases, the quantity
demanded increases, and vice versa.
- The demand curve is based on the law of demand, which states that,
all else being equal, consumers will buy more of a good when its price is
lower and less when its price is higher.
- Demand curves are often created based on data from a demand
schedule, which lists quantities demanded at different prices.
2. **Supply Curve:**
- A supply curve is a graphical representation of the relationship
between the price of a good or service and the quantity supplied by
producers, assuming other factors remain constant.
- The supply curve typically slopes upward from left to right, indicating
the direct relationship between price and quantity supplied. This means
that as the price increases, the quantity supplied also increases, and
vice versa.
 - The supply curve is based on the law of supply, which states that, all
else being equal, producers are willing to supply more of a good at
higher prices because higher prices can cover production costs and
provide an opportunity for profit.
- Supply curves are often created based on data from a supply
schedule, which lists quantities supplied at different prices.
3. **Equilibrium:*. - The point where the demand and supply curves
intersect is called the equilibrium point. At this point, the quantity
demanded equals the quantity supplied, and there is no tendency for
prices or quantities to change.
- The equilibrium price is the price at which the quantity demanded
equals the quantity supplied.

Understanding the demand and supply curves and their intersection at

equilibrium is crucial for analyzing market behavior, predicting price
changes, and making decisions about economic policies or business
strategies. These graphical representations provide a visual tool for
economists, policymakers, and businesses to understand and
communicate the dynamics of supply and demand in a market.
Demand for complementary and substitute goods
The concepts of complementary goods and substitute goods are
fundamental in understanding consumer behavior and market
dynamics. Let’s explore each concept:
1. **Complementary Goods:** Complementary goods are products or
services that tend to be used together. The demand for one
complementary good is linked to the demand for another. When the
price of one complementary good changes, it can influence the demand
for the other.
- Example:Consider the relationship between printers and printer ink
cartridges. If the price of printers decreases, it may lead to an increase
in the demand for printers, subsequently increasing the demand for
printer ink cartridges.
Impact on Demand: An increase in the price of one complementary
good typically results in a decrease in the demand for both goods, and
vice versa.
2. **Substitute Goods**: Substitute goods are products or services that
can be used in place of each other. When the price of one substitute
good changes, it tends to affect the demand for the other. If the price of
a substitute decreases, consumers may switch from one product to the
other. Example:Coffee and tea are often considered substitute
goods. If the price of coffee increases significantly, some consumers
may shift to drinking tea instead.
Impact on Demand:An increase in the price of one substitute good
often leads to an increase in the demand for the other, and vice versa.
**Market versus**
Competition:Substitute goods are often in direct competition with
each other. A change in the price or quality of one product can
significantly impact the demand for its substitutes.
Complementarity:Complementary goods are often sold together or
have a strong connection in consumption. Changes in the price or
demand for one can influence the other.
Understanding the dynamics of complementary and substitute goods is
crucial for businesses when setting prices, devising marketing strategies,
and predicting consumer behavior. These concepts help explain how
changes in the market for one product can have a ripple effect on
related products.
# Elasticity of demand and supply
Elasticity of demand and supply are concepts that measure how
sensitive the quantity demanded or supplied of a good is to changes in
price. These concepts are important in understanding how markets
respond to changes in pricing and how changes in quantity affect the
overall market equilibrium.
1. **Elasticity of Demand:* It measures the responsiveness of the
quantity demanded of a good to changes in its price. It is calculated as
the percentage change in quantity demanded divided by the
percentage change in price.
• Formula: Elasticity of Demand (Ed) = (% Change in Quantity
Demanded) / (% Change in Price)
- **Interpretation:**
• If |Ed| > 1, demand is considered elastic. This means that
consumers are relatively responsive to price changes.
 • If |Ed| = 1, demand is unit elastic.
• If |Ed| < 1, demand is inelastic. This indicates that consumers are
not very responsive to price changes.
- **Factors Affecting Elasticity of Demand:**
- Availability of substitutes. // - Necessity vs. luxury goods.
- Definition of the market. // - Time horizon.
2. **Elasticity of Supply:* It measures the responsiveness of the
quantity supplied of a good to changes in its price. It is calculated as the
percentage change in quantity supplied divided by the percentage
change in price.
• Formula: Elasticity of Supply (Es) = (% Change in Quantity
Supplied) / (% Change in Price)
- **Interpretation:**
• If |Es| > 1, supply is considered elastic. Producers are relatively
responsive to price changes.
• If |Es| = 1, supply is unit elastic.
• -If |Es| < 1, supply is inelastic. Producers are not very responsive
to price changes.
- **Factors Affecting Elasticity of Supply:**
- Time horizon: In the short run, supply may be less elastic as
producers cannot easily adjust production levels.
- Resource mobility: If resources can be easily reallocated, supply
may be more elastic.
- Spare production capacity: If producers have excess capacity, they
can quickly increase production.
 #Static and dynamic demand.
Static demand and dynamic demand refer to different aspects of how
demand for a product or service behaves over time.
Static Demand: : Static demand refers to the demand for a product or
service at a specific point in time, often in the short term. It assumes
that factors influencing demand, such as price, consumer preferences,
and market conditions, remain relatively constant during the period
under consideration.
Characteristics:
• Focuses on a specific time frame.
• Ignores the impact of changes in external variables over time.
• Assumes that the factors affecting demand remain stable.
Example: If you analyze the demand for a popular smartphone model
during a particular month without considering changes in economic
conditions, consumer preferences, or marketing strategies, you are
examining static demand.
Dynamic Demand: : Dynamic demand, on the other hand, takes into
account changes and fluctuations in demand over time. It acknowledges
that external variables, such as economic conditions, technological
advancements, and consumer trends, can impact the demand for a
product or service.
Characteristics:
• Considers changes in demand over a more extended period.
• Incorporates the impact of evolving external variables.
• Recognizes that demand can be influenced by various factors that
change over time.
Example: If you analyze the demand for electric vehicles over several
years, taking into account changes in government policies,
advancements in battery technology, and shifting consumer attitudes
towards sustainability, you are examining dynamic demand.
Consumer surplus
Consumer Surplus is calculated as the area between the demand curve
(representing the willingness to pay) and the market price line up to the
quantity consumed.
Mathematically, it can be expressed as: CS = 0.5 * (WTP – P) * Quantity
The graphical representation often involves a demand curve and a
horizontal line at the market price, with the consumer surplus as the
triangular area between the demand curve and the line at the given
quantity.
Key Points: * If the market price is below the individual consumer’s
willingness to pay, they experience consumer surplus on the units they
purchase.
• The total consumer surplus in the market is the sum of the
individual consumer surpluses across all consumers.
• Consumer surplus is a measure of economic welfare and reflects
the net gain in satisfaction or utility that consumers obtain when
purchasing goods and services in the market.
• Changes in consumer surplus can occur due to shifts in demand,
changes in market prices, or other factors influencing consumer
preferences.
Understanding consumer surplus is essential for economists,
policymakers, and businesses. Policymakers might be interested in how
changes in taxes or subsidies impact consumer surplus..
 # The theory of consumer behaviour
The theory of consumer behavior is a field of study that explores how
individuals make choices about what goods and services to consume. It
is a crucial component of microeconomics and helps economists and
businesses understand the factors influencing consumers’ decisions.
Several key theories contribute to our understanding of consumer
behavior:
1. **Utility Theory:** - Central to classical economics, utility theory
suggests that consumers make choices based on maximizing their utility
or satisfaction. Utility is subjective and varies from person to person.
- Consumers allocate their income to maximize the total utility derived
from the consumption of different goods and services.
2. **Marginal Utility:**
- Building on utility theory, marginal utility refers to the additional
satisfaction or benefit a consumer gains from consuming one more unit
of a good or service.
- Consumers strive to allocate their resources in a way that equalizes
the marginal utility per dollar across all goods and services.
3.**Budget Constraint:* - Consumers face budget constraints, which
arise from the limited income available to them. The combination of
goods and services that a consumer can afford is constrained by their
income and the prices of the goods.
4. **Consumer Preferences:** - Consumer choices are influenced by
personal preferences and tastes. These preferences are often shaped by
factors such as cultural, social, and psychological influences.
- The theory recognizes that consumer preferences can change over
time.
5. **Expected Utility Theory:** - Developed to address some of the
limitations of classical utility theory, expected utility theory incorporates
the concept of risk and uncertainty into consumer decision-making.
- It suggests that consumers make choices based not only on the
expected value of outcomes but also on their attitudes toward risk.
8. **Behavioral Economics:** - This modern approach incorporates
insights from psychology into economic analysis. It recognizes that
consumers may not always make rational decisions and can be
influenced by cognitive biases and heuristics.
Understanding consumer behavior is essential for businesses,
policymakers, and economists to predict market trends, design effective
marketing strategies, and formulate policies that enhance overall
economic welfare.
#Cardinal approach
The cardinal approach to consumer behavior is a perspective that treats
utility as a measurable and quantifiable concept. This approach
suggests that individuals can assign numerical values or cardinal
numbers to the satisfaction or utility they derive from consuming goods
and services. The focus is on comparing and ranking levels of
satisfaction or utility rather than just considering preferences in an
ordinal manner (as in ordinal utility theory).
Key points related to the cardinal approach include:
1. **Quantifiability of Utility:** In the cardinal approach, utility is
considered a measurable quantity, often expressed in numerical
terms. This allows economists to work with the concept in a more
mathematical and precise manner.
2. **Utility as a Unit of Measurement:** The unit of measurement
for utility is often referred to as “util.” The idea is that consumers
 can express their preferences and choices in terms of utils,
enabling economists to analyze and model consumer behavior
using mathematical tools.
3. **Comparative Analysis:** Cardinal utility theory allows for the
comparison of the intensity of preferences between different
goods and services. Consumers can rank or compare the level of
satisfaction derived from consuming one unit of a good versus
another.
4. **Total and Marginal Utility:** The concept of total utility (total
satisfaction from consuming a bundle of goods) and marginal
utility (additional satisfaction gained from consuming one more
unit of a good) are central to the cardinal approach. These notions
provide insights into how consumers allocate their resources to
maximize overall satisfaction.
5. **Diminishing Marginal Utility:** Similar to ordinal utility theory,
the cardinal approach often assumes the principle of diminishing
marginal utility. This means that as a consumer consumes more
units of a good, the additional satisfaction gained from each
successive unit diminishes.
Overall, while the cardinal approach has played a historical role in the
development of economic thought, contemporary economics often
emphasizes ordinal utility theory and behavioral economics, recognizing
the challenges associated with measuring and comparing subjective
experiences of satisfaction.
# Law of diminished marginal utility
The Law of Diminishing Marginal Utility is a fundamental concept in
economics that describes the decrease in the additional satisfaction or
pleasure (utility) derived from consuming an additional unit of a good
or service as the quantity consumed increases. In other words, as a
person consumes more of a particular good or service, the additional
satisfaction or utility obtained from each successive unit tends to
decrease.
The law Is based on the assumption that individuals allocate their
resources (money, time, etc.) in a way that maximizes their overall
satisfaction. When a person has a limited amount of a good, they will
allocate it to the most valued use. As they consume more units of the
same good, the marginal utility (additional satisfaction gained from
each additional unit) generally decreases.
# Law of eqi – marginal utility.
It seems there might be a slight confusion in your question. There isn’t a
specific economic law known as the “Law of Equi-Marginal Utility.”
However, there is a concept related to equalizing marginal utility, often
referred to as the “Principle of Equal Marginal Utility” or “Equi-Marginal
Utility.”
Other words, consumers will distribute their income or resources in a
way that the last dollar spent on each good provides an equal amount
of additional satisfaction. Mathematically, the principle can be
exppress:-
• MUá , MUb , MUç ……are the MU goods a ,b , c , etc,.

• Pa , Pb , Pc ,…..are the prices of good a , b, c etc,.

The principle suggests that consumers will continue reallocating their
expenditures until the marginal utility per dollar is the same across all
goods.
#Consumer Equilibrium
Consumer equilibrium refers to the point at which a consumer
maximizes their satisfaction or utility, given their budget constraints and
the prices of goods and services. In the context of microeconomics,
consumer equilibrium is reached when the consumer allocates their
income in a way that maximizes the total satisfaction or utility derived
from the consumption of different goods and services.
1. **Budget Constraint:** Consumers face budget constraints,
meaning they have a limited amount of income to spend on goods
and services. The combination of goods and services that a
consumer can afford is constrained by their budget.
2. **Utility Maximization:** The consumer aims to maximize their
total utility or satisfaction from the consumption of various goods
and services. This involves allocating their limited income to
purchase a combination of goods that provides the highest
possible level of satisfaction.
3. **Marginal Utility and Price:** Consumer equilibrium involves
considering the marginal utility of each additional unit of a good
and comparing it to the price of that good. The consumer
allocates resources in a way that equalizes the marginal utility per
dollar spent across all goods.
4. **Indifference Curve Analysis:** Indifference curves represent
combinations of goods that provide the same level of satisfaction
to the consumer. The consumer will choose a combination of
goods that lies on the highest possible indifference curve within
their budget constraint.
5. **Marginal Rate of Substitution (MRS):** The consumer achieves
equilibrium when the marginal rate of substitution (the rate at
which the consumer is willing to give up one good for another
 while maintaining the same level of satisfaction) is equal to the
ratio of the prices of the two goods.
Mathematically, consumer equilibrium can be expressed using the
condition: MRSxy = Mux. = Px
Where ; MUy Py
*MRS xy. is the marginal rate of substitution between goods x and y,
*MU x. are the marginal utilities of goods x and y, respectively,
-*MU y. are the prices of goods x and y, respectively.
The consumer will continue adjusting their consumption until this
equality is reached, indicating that they are allocating their resources in
a way that maximizes their satisfaction given the prevailing prices and
budget constraint.

# Indifference curve
An indifference curve is a graphical representation in microeconomics
showing different combinations of two goods that yield the same level
of satisfaction to a consumer. The slope of the curve represents the
marginal rate of substitution (MRS), showing how much of one good a
consumer is willing to give up for more of the other while remaining
indifferent. The curves are typically downward-sloping, indicating the
law of diminishing marginal rate of substitution, and they do not
intersect due to the non-crossing property.
The Indifference curve is a locus of points, each showing a different
combination of two substitutes, yielding the same level of utility to a
consumer. If a consumer has to decide between two commodities, they
are indifferent to any combination of products. This is why an individual
consumes various goods over time and realizes that one good can be
substituted without compromising satisfaction. Here we will learn more
about the indifference curve and properties of the indifference curve.
Properties of indifference curve
Indifference curves have several key properties that help explain
consumer preferences and choices. These properties are fundamental
to understanding the concept of indifference curves in microeconomics:
1. **Downward Sloping:*
- Indifference curves slope downward from left to right. This reflects
the principle of diminishing marginal rate of substitution. As a consumer
gives up some units of one good, they need more units of the other
good to maintain the same level of satisfaction.
2. **Convex Shape:** - Indifference curves are often convex (bowed
inward). This curvature reflects the diminishing marginal rate of
substitution. It means that as a consumer moves along the curve, the
willingness to trade one good for another diminishes.
3. **Non-Intersecting:**
- Indifference curves for different levels of satisfaction do not
intersect. This property ensures consistency; if two curves were to
intersect, it would imply that the same combination of goods provides
different levels of satisfaction, which contradicts the concept of
indifference curves.
4. **Indifference Map:**. - A collection of indifference curves, each
representing a different level of satisfaction, forms an indifference map.
The map helps illustrate how the consumer’s preferences change as
they move to higher or lower levels of satisfaction.
5. **Higher Indifference Curve, Higher Satisfaction:**
- Points on a higher indifference curve represent combinations of
goods that provide higher satisfaction than points on a lower curve. The
further away from the origin a curve is, the higher the level of
satisfaction it represents.
6. **Marginal Rate of Substitution (MRS):**. - The slope of an
indifference curve at any point is the marginal rate of substitution
(MRS). It represents the rate at which the consumer is willing to give up
one good in exchange for another while maintaining the same level of
satisfaction. The MRS diminishes as one moves along the curve.

Consumer’s equilibrium of indifference curve