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MODULE : 1 2. Income Elasticity of Demand: The income is the other factor
DEMAND ANALYSIS: Introduction; Demand Analysis: The that influences the demand for a product. Hence, the degree of
Consumer, Demand Concepts, Own-Price Elasticity of Demand, responsiveness of a change in demand for a product due to the change in the
Income Elasticity of Demand, Cross-Price Elasticity of Demand. income is known as income elasticity of demand. The formula to compute
the income elasticity of demand is:
Substitution and Income Effects. Normal and Inferior Goods.
Indifference Curve Analysis. Demand Forecasting: Need,
Techniques and Procedures.

DEMAND ANALYSIS :
1. Normal Goods (YED>0YED>0)
Demand analysis is a fundamental aspect of economics and business,
2. Luxury Goods (YED>1YED>1)
focusing on understanding the factors that influence consumer demand for 3. Necessities (0<YED<10<YED<1)
goods and services. It examines how the quantity demanded of a product or 4. Inferior Goods (YED<0YED<0)
service responds to various factors such as price, income levels,
preferences, and the prices of related goods.
3. Cross Elasticity of Demand: The cross elasticity of demand
Components of Demand Analysis: refers to the change in quantity demanded for one commodity as a result of
1. Demand Curve:. the change in the price of another commodity.
2. Factors Affecting Demand:
o Price of the Good:.
o Income of Consumers:.
o Consumer Preferences:.
o Price of Related Goods:
§ Substitute Goods:. Types of Cross Elasticity of Demand
1. Substitute Goods (XED>0XED>0)
§ Complementary Goods:. 2. Complementary Goods (XED<0XED<0)
o Expectations:. 3. Unrelated Goods (XED=0XED=0)
o Seasonality:.
3. Elasticity of Demand: Importance of XED in Real Life
o Price Elasticity of Demand (PED):. 1. Business Strategy:
o Income Elasticity of Demand:. 2. Product Bundling:
o Cross-Price Elasticity of Demand:. 3. Taxation Policies:
4. Types of Demand: 4. Market Competition:
o Individual Demand:.
o Market Demand:. 4. Advertising Elasticity of Demand: The responsiveness of
the change in demand to the change in advertising or rather promotional
expenses, is known as advertising elasticity of demand. In other words, the
change in the demand as a result of the change in advertisement and other
Elasticity of Demand : promotional expenses is called as the advertising elasticity of demand. It
Definition: The Elasticity of Demand measures the percentage change can be expressed as:
in quantity demanded for a percentage change in the price. Simply, the
relative change in demand for a commodity as a result of a relative change
in its price is called as the elasticity of demand. Importance : Understanding
elasticity helps in:
1. Pricing strategies:. Types of Advertising Elasticity of Demand
2. Tax policies:. 1. High Advertising Elasticity (AED>1AED>1)
3. Production planning:. 2. Low Advertising Elasticity (AED<1AED<1)
3. Zero Advertising Elasticity (AED=0AED=0)

Importance of Advertising Elasticity of Demand

1. Optimizing Advertising Budgets
Types of Elasticity of Demand 2. Evaluating Advertising Strategies
3. Launching New Products
4. Market Analysis
Income Cross Advertising
Price Elasticity Elasticity of
Elasticity of Elasticity of
of Demand:
Demand: Demand: Demand: What is an Indifference Curve?
A curve or a graphical representation of the combination of
different goods providing the same satisfaction level to the
consumer is known as Indifference Curve .
1. Price Elasticity of Demand: The price elasticity of demand, Features of Indifference Curves
commonly known as the elasticity of demand refers to the responsiveness 1. Utility is Constant on the Curve:.
and sensitiveness of demand for a product to the changes in its price. In 2. Downward Slope:.
other words, the price elasticity of demand is equal to 3. Convex to the Origin:.
4. Non-Intersection:.
5. Higher Curves Represent Higher Utility:.

The following are the main Types of Price Elasticity of Demand: Components :
1. Elastic Demand (PED>1PED>1) 1. Indifference Curve always slopes downwards from left to right :
2. Inelastic Demand (PED<1PED<1)
3. Unitary Elastic Demand (PED=1PED=1)
2. Indifference Curves are always convex to the point of origin
4. Perfectly Elastic Demand (PED=∞PED=∞) 3. Higher Indifference Curves represent a higher level of satisfaction
5. Perfectly Inelastic Demand (PED=0PED=0) 4. Two Indifference Curves cannot intersect each other
5. An Indifference Curve never touches either of the axes

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The following assumptions of indifference curves:
1. Rationality MODULE : 5
2. Completeness NATIONAL INCOME AND BUSINESS CYCLE: National Income –
3. Transitivity Concept and Measurement, Theory of National Income
4. Non-Satiation (More is Better)
Determination – Multiplier and Accelerator Theories. Overview of
5. Diminishing Marginal Rate of Substitution (MRS)
6. Continuity the Business Cycle: Phases of the Business Cycle; Factors causing
7. Non-Intersection swings in business activity and measures to control business cycles.
8. Utility is Ordinal
Business cycle:
1. The business cycle is also known as the economic cycle or trade
DEMAND FORECASTING cycle.
2. The business cycle describes the rise and fall in production output
According to Evan J. Douglas, “Demand estimation of goods and services in an economy.
(forecasting) may be defined as a process of finding values 3. The cycle is a useful tool for analyzing the economy. It can also
for demand in future time periods.” help you make better financial decisions.
4. The National Bureau of Economic Research determines business
Objectives of Demand Forecasting. : cycle stages using quarterly GDP growth rates.
1. Accurate Inventory Management: 5. It also uses monthly economic indicators, such as employment, real
2. Production Planning: personal income, industrial production, and retail sales.
3. Resource Allocation: 6. The government manages the business cycle.
4. Financial Planning and Budgeting:
5. Improved Customer Satisfaction:
6. Strategic Decision-Making:
7. Mitigating Risks:

Need for Demand Forecasting

1. Market Volatility:
2. Global Supply Chains:
3. Cost Control:
4. New Product Launches:
5. Seasonality:
6. Capacity Utilization:
7. Competition:
8. Data-Driven Decision Making:
Stages:
Methods of Demand Forecasting: 1. Expansion (increase in production and prices, low interest-rates)
1. Survey method 2. Recession (drops in prices and in output, high interest-rates)
i) Consumer Survey Method. 3. peak phase:
a) Complete Enumeration Method:. 4. Trough (phase, the economic activities of a country decline below
b) Sample Survey:. the normal level.
c) End-use Method: 5. Recovery
ii) The Opinion Poll Methods. 6. Depression :
a) Expert-Opinion Method:, i) Lowest point of real GDP
b) Delphi Method: ii) Out put & unemployment bottom out
c) Market Studies and Experiments: iii) This phase may be short lived
2. Statistical method
i) Trend Projection Method : Factors Causing Swings in Business Activity :
ii) Barometric Method :. 1. Demand-Side Factors
iii) Econometric Methods :.
• Consumer Spending:
• Investment Fluctuations:
Process / Steps in Demand Forecasting • Government Policies:
1. Define Objectives:. 2. Supply-Side Factors
2. Collect Data:. • Resource Costs:
3. Choose a Method:. • Technological Advances:
4. Analyze Data:. • Natural Disasters and Pandemics:
5. Generate Forecasts:. 3. External Factors
6. Validate and Adjust:. • Global Trade Conditions:
7. Implement and Monitor:. • Geopolitical Events:
• Financial Market Volatility:
4. Psychological Factors
• Investor and Consumer Confidence:

Measures to Control Business Cycles :

(a) Preventive Measures :.

1. Stable Economic Policies:
o Consistent Fiscal Policy:.
o Predictable Monetary Policy:.
2. Diversified Economy:.
3. Supply Chain Resilience:.
4. Regulatory Framework:.
5. Education and Skill Development:.
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(b) Corrective Measures :.

During Expansion (to prevent overheating):
1. Monetary Tightening:. MODULE : 3
2. Fiscal Contraction:.
3. Trade Policies:
.
MARKET STRUCTURE :
Market structure refers to the characteristics of a market that
CIRCULAR FLOW MODEL OF ECONOMY : influence the behavior and performance of firms operating within
The circular flow model provides a framework to understand how money it. These characteristics determine the degree of competition,
and resources move through the economy. Fiscal and monetary pricing strategies, and market efficiency.
policies act as levers to regulate this flow, ensuring economic stability,
controlling inflation, and fostering growth. FACTORS :
1. Number of Firms in the Market
Types of Flows in the Circular Flow Model 2. Product Differentiation
1. Real Flow:. 3. Barriers to Entry and Exit
2. Monetary Flow:. 4. Market Power
5. Price Determination
6. Nature of Competition
7. Market Transparency
8. Long-Run Equilibrium

Factors / Forms of Market Structure:

1. Perfect Competition
2. Monopoly
3. Duopoly
4. Oligopoly
5. Monopolistic Competition

MONOPOLY
A monopoly is a market structure where a single firm or entity is
the sole producer or seller of a product or service with no close
substitutes. This gives the monopolist significant market power to
set prices and control the supply.

Features of Monopoly
Components of the Circular Flow Model
1) The Two-Sector Model (Simplified Circular Flow): 1. Single Seller:
1. Households: Provide labor and resources to businesses. 2. No Close Substitutes:.
2. Businesses: Produce goods and services using resources provided by households.
2) The Three-Sector Model (Including Government) 3. High Barriers to Entry:.
3) The Four-Sector Model (Including Foreign Sector) 4. Price Maker:.
5. Market Power:.
Objectives of Fiscal Policy in the Circular Flow Model.
1. Stabilizing Economic Fluctuations: Examples of Monopoly in India
2. Promoting Economic Growth:
3. Redistributing Income:. 1. Indian Railways
4. Employment Generation: 2. Life Insurance Corporation of India (LIC)
5. Controlling Inflation and Deflation: 3. Oil and Natural Gas Corporation (ONGC)
4. Coal India Limited (CIL)
Objectives of Monetary Policy in the Circular Flow Model :. 5. State Electricity Boards (SEBs)
1. Price Stability:.
2. Full Employment: Demand-Supply Analysis in Monopolistically Competitive Markets
3. Economic Growth: 1. Demand Curve:
4. Balance of Payments Stability: 2. Supply Curve:.
5. Liquidity Management: 3. Market Behavior:
o In the Short Run:.
Roles of Fiscal Policy in Monitoring the Flow of Money:
1. Government Spending (Injecting Money into the Economy):
o In the Long Run:.
2. Taxation (Withdrawing Money from the Economy):
3. Redistribution of Income:
Factors Affecting Long-Run Equilibrium
4. Managing Inflation:
1. Product Differentiation:.
Roles of Monetary Policy in Monitoring the Flow of Money: 2. Market Entry and Exit:
3. Advertising and Brand Loyalty:
1. Controlling Money Supply:
4. Cost Structures:
2. Interest Rates (Cost of Borrowing):
3. Managing Inflation and Stabilizing Prices:. 5. Consumer Preferences:
4. Encouraging Investment:

MONOPOLY:
Demand-Supply Analysis in Monopoly Markets; Optimal
Price and Output in Monopoly Markets

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Real-World Examples
1. Airline Industry: ( Airlines optimize seat capacity and pricing using demand forecasts
and competitor behavior. )
2. Smartphones (Apple and Samsung): ( Firms set premium prices based on
product differentiation and limited output of flagship models. )

Factors Influencing Long-Run Equilibrium

1. Barriers to Entry
o Economies of Scale:.
o Capital Requirements:.
o Legal Barriers:.
o Brand Loyalty:
2. Technological Innovation
3. Market Demand and Consumer Preferences
4. Collusion Sustainability Collusion among firms (explicit or tacit) can help
maintain higher prices and profits, mimicking monopoly behavior.
characteristics of a monopolistic market: 5. Non-Price Competition
1. Single supplier 6. Cost Structure
2. Barriers to entry and exit 7. Globalization and Trade Policies
3. Profit maximizer. 8. Regulatory Environment
4. Unique product 9. Mergers and Acquisitions (M&A)
5. Price discrimination :

Steps to Determine Optimal Price and Output in Monopoly Markets

1. Determine the Profit-Maximizing Output: Profit Maximization Price discrimination
Rule: MR = MC Price discrimination is a pricing strategy where a firm
2. Set the Price:
3. Profit Calculation: charges different prices to different consumers for the
same good or service, based on various factors such as
Graphical Representation of Optimal Price and Output in Monopoly
1. Demand Curve (D):
willingness to pay, age, location, or purchase volume.
2. Marginal Revenue Curve (MR):
3. Marginal Cost Curve (MC): Conditions for Price Discrimination::
4. Profit-Maximizing Output (Q): 1) Difference in Elasticity of Demand:.
5. Price (P):
2) Market Imperfections:.
3) Differentiated Product:.
4) Legal Sanction:.
5) Monopoly Existence:.
OLIGOPOLY
oligopoly is a type of market structure in which a small Types of Price Discrimination:
number of firms control the market. 1. First-Degree Price Discrimination (Personalized Pricing)
2. Second-Degree Price Discrimination (Product Versioning or Bulk Pricing)
Oligopoly Examples 3. Third-Degree Price Discrimination (Group Pricing)
• Automobiles: ( Toyota, Ford, General Motors, Volkswagen, Hyundai,) § Age (e.g., student or senior discounts)
• Smartphones: Apple, Samsung, Xiaomi, Oppo,
§ Location (e.g., geographical pricing, like different prices in different countries)
§ Income (e.g., discounts for low-income consumers)
• Social Media Platforms: : Meta (Facebook, Instagram, WhatsApp), X
(formerly Twitter), TikTok, and Snapchat. § Occupation (e.g., student or teacher discounts)

Features of Demand-Supply Analysis in Oligopolies

1. Interdependence:
2. Limited Supply Control:
3. Kinked Demand Curve: MODULE :2
o Firms face a kinked demand curve, which reflects the
asymmetric response of competitors to price changes:
The Law of Supply is a fundamental economic principle that
§ Elastic demand above the kink:.
§ Inelastic demand below the kink:. explains the relationship between the price of a good or service and
4. Non-Price Competition: the quantity producers are willing and able to supply. It states:
5. Supply Constraints:
Characteristics:
1. Direct Relationship:
Pricing Strategies in Oligopoly Markets 2. Supply Curve:
1. Price Rigidity:. 3. Ceteris Paribus: ( The law assumes no other factors (like
2. Price Leadership: production costs, technology, or taxes) change, isolating price as the
3. Collusion: only variable affecting supply.)
4. Non-Price Competition: ( Example: Apple and Samsung.
5. Price Discrimination: ( Example: Airlines charging varying ticket
prices for business and economy class. ) Determinants of Supply (Factors Shifting the Supply Curve):
6. Predatory Pricing: Temporarily lowering prices to drive competitors out of the market, then • Production Costs:
raising prices once dominance is achieved.
• Technology:.
Key Factors Influencing Optimal Price and Output • Taxes and Subsidies:.
1. Cost Structures:. • Number of Sellers:.
2. Market Demand:
3. Barriers to Entry: • Expectations:.
4. Collusion Sustainability: • Weather/Natural Factors:.
5. Product Differentiation:
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Theory of Production Types of Production Functions:

The Theory of Production is a fundamental concept in economics 1. Short-Run Production Function:
that examines the process by which inputs (resources) are 2. Long-Run Production Function:
Properties of the Production Function:
transformed into outputs (goods or services). It focuses on
1. Law of Diminishing Returns (in the short run):.
understanding how firms combine inputs to maximize output and 2. Returns to Scale (in the long run):
minimize costs while optimizing their production processes. o This refers to how output changes when all inputs are
increased proportionally:
Components of the Theory of Production: § Increasing Returns to Scale:.
1. Inputs: § Constant Returns to Scale:.
§ Land: Natural resources. § Decreasing Returns to Scale:.
§ Labor: Human effort.
§ Capital: Machinery, tools, and infrastructure.
§ Entrepreneurship: Managerial and decision- LAW OF VARIABLE PROPORTIONS :
making ability.
2. Output: he Law of Variable Proportions, also known as the Law of
o The goods or services produced using the inputs. Diminishing Returns, is a fundamental principle in economics that
3. Production Function: describes how the output of a production process changes as the
o A mathematical representation showing the quantity of one input varies while other inputs are kept constant.
relationship between inputs and output. This law is applicable in the short run, where at least one factor of
Q=f(L,K,T) production (such as capital) is fixed.
Where: Ø LVP is also known as ‘ Law of Returns’ or ‘ Returns to
§ Q: Output Variable factor ‘
§ L: Labor
§ K: Capital Assumptions of the Law of Variable Proportions:
§ T: Technology 1. One Factor is Variable, the Other is Fixed:
4. Short-Run vs. Long-Run Production: 2. Short-Run Time Period:
3. Technological Progress is Constant:
Short-Run: A period in which at least one input (typically 4. Fixed Technology:
capital) is fixed, while others (like labor) can vary. 5. Efficiency of Fixed Inputs:
Long-Run: A period in which all inputs are variable, and 6. No External Shocks or Disturbances:
firms can adjust all factors of production to achieve the 7. Short-Run Production Function:
optimal output level.
Reasons for Variable Proportion
A. Reasons for Increasing Returns to a Factor (Phase I):
Factors affecting production ;
1. More Effective Use of Fixed Factor:.
1. Land (Natural Resources)
2. Labor (Human Resources) 2. Increased Efficiency of Variable Factor:
3. Capital (Physical and Financial Resources) 3. Fixed Factor Indivisibility: .
4. Entrepreneurship (Management and Innovation) B. Reasons for Decreasing Returns to a Factor (Phase II):
5. Technology 1. Optimum Combination of Factors: .
6. Government Policies and Regulations 2. Over-utilization of Resources: .
7. Capital Formation and Investment 3. Imperfect Substitutes: .
8. Availability of Raw Materials C. Reasons for Negative Returns to a Factor (Phase III):
9. Market Demand
10. Capital and Labor Mobility
1. Limitation of Fixed Factor: .
11. Climate and Weather Conditions 2. Lack of Coordination: .
12. Infrastructure 3. Decrease in Efficiency of Variable Factor: .
13. Competition
14. Economies of Scale

Isoquant Curves
Production Function Ø The term Iso-quant or Iso-product is composed of
1. The functional relationship between physical inputs two words, Iso = equal, quant = quantity or product =
(or factors of production) and output is called output.
production function. Ø “Iso-product curve shows the different input
combinations that will produce a given output.”
Samuelson OR “The Iso-product curves show the
different combinations of two resources with which
a firm can produce equal amount of product.” Bilas

Assumptions:
1. Two Factors of Production: (Only two factors are used to
produce a commodity.)
2. Divisible Factor(Factors of production can be divided into
small parts.)
3. Constant Technique (Technique of production is constant
or is known before hand.)

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4. Possibility of Technical Substitution (The substitution
between the two factors is technically possible. That is,
production function is of ‘variable proportion’ type rather than
fixed proportion.)
5. Efficient Combinations (Under the given technique,
factors of production can be used with maximum efficiency.)
6. These factors can be substituted for each other.
7. The factors of production can be divided into small parts.
8. It is assumed that technology remains constant.
9. The shape of the Iso-quant depends on the level of
substitutability between the factors of production.

4. Kinked Isoquant :
Types of Isoquants
1. Linear Isoquant : . Explain laws of return to scales with cobbs Douglas
production function?
Ans :
1. The law of returns to scale explains the proportional change
in output with respect to proportional change in inputs.
2. the laws of return to scale describe how the output of a
production process changes when all inputs are scaled
proportionally. The Cobb-Douglas production function is a
commonly used functional form in economics to study
production. It is generally written as:
Q=ALαKβ
Where:
Q: Output
L: Labor input
K: Capital input
2. Smooth Convex Isoquant :. A: Total factor productivity (a constant)
α,β: Output elasticities of labor and capital, respectivel

law of returns can be classified into three categories:

a. Increasing returns to scale
b. Constant returns to scale (
c. Diminishing returns to scale

Where;
§ Q is the quantity of product
§ L is the amount of labor
§ K quantity of capital
§ A = is a + ve constant (also called as technology coefficient)
3. . Leontief or Right Angled Isoquant :. § Β ά are constant between 0 and 1. (also called as output elasticities)
§ If Β + ά = 1 (production function has constant return to scale)
§ If Β + ά > 1 (production function has increasing return to scale)
For example, if the output elasticity for physical capital (K)
is 0.60 and K is increased by 20 percent, then output
increases by 3 percent (0.6/0.2).
The same is true for the output elasticity of labor: an
increase of 10 percent in L with an output elasticity of 0.40
increases the output by 4 percent (0.4/0.1).

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Causes of Diseconomies of Scale

Cost-Output Function: 1. Management Complexity:.
The Cost-Output Function describes the relationship between the 2. Coordination Problems:.
total cost of production and the level of output produced by a firm. 3. Employee Motivation:.
It provides insights into how costs change as a firm varies its 4. Increased Bureaucracy:.
output level. 5. Overextension of Resources:
Total Cost Function
The total cost (C) is generally expressed as a function of output (Q):
C(Q) = FC + VC(Q)
Where:
• C(Q) : Total cost of producing Q units of output.
• FC : Fixed cost, which does not vary with the level of output (e.g.,
rent, salaries of permanent staff).
• VC(Q) : Variable cost, which changes with the level of output (e.g., raw
materials, labor directly involved in production).

Cost function is divided into namely two types :

1. Short Run Cost:
2. Long Run Cost :

ECONOMIES AND DISECONOMIES OF SCALE.

§ Economies of scale are when the cost per unit of production
(Average cost) decreases because the output (sales) increases.
§ Diseconomies of scale are when the cost per unit of
production (Average cost) increases because the output
(sales) increases.

Economies of Scale
Economies of scale refer to the cost advantages that a firm can
realize as it increases its level of production. As a firm expands, it
can reduce the per-unit cost of production due to factors such as
the spreading of fixed costs, operational efficiencies, and the ability
to purchase inputs in bulk at lower prices.

Features of Economies of Scale:

• Average Cost Declines:.
• Fixed Costs Spread:.
• Specialization and Division of Labor:.
• Bulk Purchasing:.
• Technological Efficiency:.
• Financial Advantages:.

Types of Economies of Scale:

1. Internal Economies of Scale:.
2. External Economies of Scale:

Diseconomies of Scale
Diseconomies of scale occur when a firm becomes too large and
its average cost of production increases as output expands. This
can happen due to inefficiencies that arise from managing a larger
operation.

Features of Diseconomies of Scale:

• Management Challenges.
• Decreased Employee Morale:
• Bureaucracy:.
• Overuse of Resources:.
• Logistical Problems:.

Causes of Economies of Scale

1. Technical Factors:.
2. Managerial Factors:.
3. Purchasing Power: s.
4. Financial Factors:.
5. Marketing and Distribution:.
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