Scribd
Upload
11 views3 pages

Economics Topics Notes

The document covers various economics topics including supply and demand curves, market mechanisms, elasticity, and government market controls. It also discusses consumer behavior through indifference curves, income and substitution effects, and the impact of price changes on purchasing power. Key concepts such as marginal rate of substitution, budget lines, and the distinction between normal and inferior goods are explored, with some sections noted as not fully understood.

Uploaded by

Hareema Kamran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
11 views3 pages

Economics Topics Notes

The document covers various economics topics including supply and demand curves, market mechanisms, elasticity, and government market controls. It also discusses consumer behavior through indifference curves, income and substitution effects, and the impact of price changes on purchasing power. Key concepts such as marginal rate of substitution, budget lines, and the distinction between normal and inferior goods are explored, with some sections noted as not fully understood.

Uploaded by

Hareema Kamran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

ECONOMICS TOPICS

CH 2

1. Supply curve (OTHER VARIABLES THAT AFFECT SUPPLY: production costs ( if costs go down, more
Qs at less price)
2. Demand curve and factors, Complimentary and substitutes goods
3. Market mechanism, surplus and shortage situation
4. Changes in market equilibrium (supply and demand curve shifts)
5. Steep and flat demand curve elasticity, infinitely elastic demand, completely inelastic demand
6. income elasticity of demand and cross price elasticity
7. point and arc elasticity
8. short run and long run elasticities
9. Govt Market controls

NOT UNDERSTOOD
 LINEAR DEMAND CURVE EXAMPLE Q= A – BP
 Understanding and predicting demand in market condition the whole equation steps and how to
interpret and analyze that

CH 4
 Individual demand
 For price and income consumption curves, original laws and relationships will be followed.
 Normal goods: Qd increased when income increased
 Inferior goods: Qd falls when income increased
 Market Demand Curve
 Elasticity of demand

 NOT UNDERSTOOD ch 4
 Indifference curve
 At every point on the demand curve, the consumer is maximizing utility by satisfying the
condition that the marginal rate of substitution (MRS) of food for clothing equals the ratio of the
prices of food and clothing.
 Engel curve
 Income and substitution effect (Budget line new in income and substitution effect)

INDIFFERENCE CURVE AND INCOME AND SUBSTITUTION EFFECT


 By indifferent we mean that a person will be equally satisfied with either basket.
 We can show a consumer’s preferences graphically with the use of indifference curves. An
indifference curve represents all combinations of market baskets that provide a consumer with
the same level of satisfaction. That person is therefore indifferent among the market baskets
represented by the points graphed on the curve.
 Graphically, the indifference curve goes through different market baskets and these are the
market baskets that the consumer is indifferent to, the market basket above the curve is the one
that consumer prefers as compared to the others and the market baskets below the curve are
not preferred compared to market baskets on the curve.
 In indifference maps, different indifference curves are shown. The indifference curve on the top
and towards the right side would show the market basket that has the highest preference as
compared to the indifference curves’ market baskets below them.
 Reason for preferring market baskets above the curve is the assumption that more is always
better so the market basket above and on right side shows more quantity.
 The fact that indifference curves slope downward follows directly from our assumption that
more of a good is better than less.
 marginal rate of substitution (MRS) Maximum amount of a good that a consumer is willing to
give up in order to obtain one additional unit of another good.
 MRS measures the value that the individual places on 1 extra unit of a good in terms of another.
 The Marginal Rate of Substitution (MRS) at any point is equal to the magnitude of the slope of
the indifference curve because it represents the rate at which a consumer is willing to trade one
good for another while maintaining the same level of satisfaction.
 When the MRS diminishes along an indifference curve, the curve is convex.
 Units given up in MRS are written with – sign and then put into the formula: - change in good
given up/ change in good gained so e.g if units given up are -6 then in the formula we will write
-(-6)/1 so it will become 6 so MRS is 6.
 two goods are perfect substitutes when the marginal rate of substitution of one for the other is a
constant.
 perfect complements Two goods for which the MRS is zero or infinite; the indifference curves
are shaped as right angles.
 bad :Good for which less is preferred rather than more. E.g air pollution
 UTILITY: Using this numerical approach, we can describe consumer preferences by assigning
scores to the levels of satisfaction associated with each indifference curve.

BUDGET LINE AND INCOME AND SUBSTITUTION EFFECT

 budget line All combinations of goods for which the total amount of money spent is equal to
income.
 Purchasing power is determined not only by income, but also by prices. For example, our
consumer’s purchasing power can double either because her income doubles or because the
prices of all the goods that she buys fall by half.
 A fall in the price of a good has two effects: 1. Consumers will tend to buy more of the good
that has become cheaper and less of those goods that are now relatively more expensive.
This response to a change in the relative prices of goods is called the substitu tion effect.
 2. Because one of the goods is now cheaper, consumers enjoy an increase in real purchasing
power. They are better off because they can buy the same amount of the good for less
money, and thus have money left over for additional purchases. The change in demand
resulting from this change in real purchasing power is called the income effect.
 substitution effect Change in consumption of a good associated with a change in its price,
with the level of utility held constant.
 income effect Change in consumption of a good resulting from an increase in purchasing
power, with relative prices held constant

Two Scenarios for the Income Effect:

 When Income Changes (Prices Constant):


o If you get a raise (but prices remain the same), your purchasing power
increases, and you can afford more goods. You move to a higher indifference
curve. This is the pure income effect.
 When Prices Change (Real Income Changes):
o When the price of a good decreases, you experience an increase in real
income because you can now afford more with the same money. The shift to a
higher indifference curve represents the income effect of this price change.
o If the price increases, your real income decreases, and you move to a lower
indifference curve.

 The parallel budget line (often called the compensated budget line) is created to isolate the
substitution effect. It’s parallel to the second budget line because it reflects the same relative
prices (price ratio) but adjusted to the initial level of utility. This helps us show how much the
consumer would change their consumption just due to the change in relative prices, holding
their utility constant (so the consumer stays on the same indifference curve). This way, we only
observe how the price change affects the choice of goods (without the influence of income
changes).
 The market basket on the parallel line demonstrates the change in consumption due to the price
change alone, as it isolates the substitution effect by keeping the consumer on the same level of
utility.
 Movement to a New Indifference Curve: The consumer will move to a higher indifference curve
(if their real income increases due to a price drop) or a lower indifference curve (if their real
income decreases due to a price rise). The new indifference curve reflects a different level of
utility. This movement from one indifference curve to another captures the income effect.
 The role of the indifference curve is to show consumer preferences and the level of utility. It
helps distinguish between the movement along the curve (substitution effect) and the
movement to a different curve (income effect).

You might also like