Economics-I (BALLB 207)

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, SectorA-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
SEMESTER: THIRD
BALLB
NAME OF THE SUBJECT: ECONOMICS - I
FACULTY NAME: Ms. Preeti Goel
Academic Coordinator, B.A.LL.B(H)

Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
UNIT-I: INTRODUCTION TO ECONOMICS
A. Definition, Methodology, Scope of Economics
B. Basic Concepts and Precepts: Economic Problems, Economic Agents,
Economic Organizations, Marginalism, Time Value of Money, Opportunity
Cost
C. Forms of Economic Analysis: Micro vs. Macro, Partial vs. General, Static
vs. Dynamic, Positive vs. Normative, Short run vs. Long run
D. Relation between Economics and Law: Economic Offences and Economic
Legislations

Introduction
• Economics is a study of ‘Choices’ or ‘Choice Making.’ In other words, what
choices people make and how and why they make them when making
purchases. Choice-making is relevant for every individual, family, society,
institution, area, state, nation, i.e. for the whole world.
• The study of economics can be subcategorized into microeconomics and
macroeconomics.
• Microeconomics is the study of economics at the individual or business level;
how individual people or businesses behave given scarcity and government
intervention. Microeconomics includes concepts such as supply and demand,
price elasticity, quantity demanded, and quantity supplied.
• Macroeconomics is the study of the performance and structure of the whole
economy rather than individual markets. Macroeconomics includes concepts
such as inflation, international trade, unemployment, national production, etc.
• Economics has wide application and relevance to all individuals and
institutions.

• A. DEFINITION,
METHODOLOGY,
SCOPE OF ECONOMICS

Meaning of the word ‘Economics’
• The word ‘Economics’ originates from a Greek word ‘Oikonomikos.’This
Greek word has two parts: – ‘Oikos’ meaning ‘Home’ –and ‘Nomos’ meaning
‘Management.’ Hence, Economics means ‘Home Management.’
• Economics emerged as a subject with high level of applications in all other
disciplines due to its basic principle of ‘Choice making for optimization with
the given resources of scarcity and surplus’.
• To arrive at the current definition of economics, it has taken almost 235 years.
I. DEFINITION

Evolution in the Definitions of Economics
• A. Wealth Definition (1776) Adam Smith
• B. Welfare Definition (1890) Alfred Marshall
• C. Scarcity Definition (1932) Lionel Robbins
• D. Growth Definition (1948) P.A. Samuelson
• E. Modern Definition (2011) A.C. Dhas

WEALTH DEFINITION (1776)
• Adam Smith, who is regarded as Father of Economics, published a book
titled ‘An Inquiry into the Nature and Causes of the Wealth of Nations’
in 1776. He defined economics as “a science which inquires into the nature
and cause of wealth of nations”. He emphasized the production and growth
of wealth as the subject matter of economics.
Features of Wealth Definition
A. Economics is the study of wealth only and deals with consumption,
production, exchange, and distribution of wealth.
B. It takes into account only material goods that are scarce and useful. Non-
material goods like services and free goods like air and water are not wealth.
C. It inquires the causes behind creation of wealth, which means economic
development. To increase wealth, production of material goods will have to be
increased, which requires more investment, which is possible in free economy.

Criticisms of Wealth Definition:
• It gives too much importance to wealth. It gave emphasis only to wealth
and reduced man to secondary place.
• It defines wealth in a very narrow and restricted sense. It considered
only material and tangible goods. Non-material goods//services are not
taken as wealth.
• It does not mention the economic welfare of society, i.e. paid no
attention to equitable distribution.
• It does not tell us the means for earning wealth. It defined earning of
wealth as an end in itself.
• It studies economics as a ‘dismal science’, as it taught selfishness which
was against ethics.

WELFARE DEFINITION (1890)
In 1890, Alfred Marshall in his book “Principles of Economics” (1890) stated
that “Economics is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely
connected with the attainment and with the use of material requisites of
wellbeing”. It is on one side a study of wealth; and on the other side, a study of
human welfare based on wealth.
Features of Welfare Definition
1. It is primarily the study of mankind.
2. It takes into account ordinary business of life.
3. It studies both individual and social actions.
4. It is on one side a study of wealth; and on other side the study of welfare of
man.
5. It emphasizes on material welfare i.e., human welfare which is related to
wealth.

Criticisms of Welfare Definition
• It considers economics as a social science rather than a pure science. (pure
because it has universally applicable laws).
• It restricts the scope of economics to the study of material goods only. But
immaterial things are ignored, such as the services of a doctor, a teacher and so
on, also promote welfare of the people.
• It restricts economics to study of ordinary man but economics is the study of
all men, whether ordinary or otherwise. All face problem of choice.
• It lacks the clear concept of welfare. Welfare in itself has a wide meaning which
is not made clear in definition.
• Welfare cannot be quantitatively measured as it depends on feelings. Different
individuals get different amount of satisfaction from the same quantity of material
purchased.

SCARCITY DEFINITION (1932)
According to Lionel Robbins, in his book ”An Essay on the Nature and
Significance of Economic Science (1932)”, he defined “Economics is the
science which studies human behavior as a relationship between ends and
scarce means which have alternative uses” • He emphasized on ‘choice
under scarcity.’
FEATURES OF SCARCITY DEFINITION
A. Unlimited wants.
B. Scarce means.
C. Alternate uses of means.
D. It emphases on Choice – A study of human behavior It tried to bring the
economic problem which forms the foundation of economics as a social
science. It takes into account all human activities.

GROWTH DEFINITION (1948)
• According to Prof. Paul A Samuelson “Economics is the study of how men and
society choose with or without the use of money, to employ the scarce productive
resources which have alternative uses, to produce various commodities over time
and distribute them for consumption now and in future among various people and
groups of society. It analyses the costs and benefits of improving pattern of
resource allocation”.
• The title of the book written by him is Economics: An Introductory Analysis
(1948).
• This definition introduced the dimension of growth under scarce situation.

Criticisms of Scarcity Definition
• It does not focus on many important economic issues of cyclical instability,
unemployment, income determination and economic growth and development.
• It did not take into account the possibility of increase in resources over time.
• It has treated economics as a science of scarcity only.

Features of Growth Definition
• It is not merely concerned with the allocation of resources but also with the
expansion of resources.
• It analyzed how the expansion and growth of resources to be used to cope with
increasing human wants. It is a more dynamic approach. It considers the problem
of resource allocation as a universal problem. It focused on both production and
consumption activities.
• It is comprehensive in nature as it is both growth-oriented as well as future-
oriented. It incorporated the features of all the earlier definitions
Criticisms of Growth Definition:
• It assumes that economics is relevant for scarcity situations and it ignored
surplus resource conditions.

MODERN DEFINITION (2011)
• According to Prof.A.C.Dhas, “Economics is the study of choice making by
individuals, institutions, societies, nations and globe under conditions of
scarcity and surplus towards maximizing benefits and satisfying their
unlimited needs at present and future”.
• The title of the book written by him is Modern Definition of Economics
(2011).
• In short, the subject Economics is defined as the “Study of choices by all in
maximizing production and consumption benefits with the given resources
of scarce and surplus, for present and future needs.

Features of Modern Definition
• It takes into account all the earlier definitions – wealth, welfare, scarcity and
growth.
• It covers both micro and macro aspects of economics.
• It considers both production and consumption activities.
• It emphasises Choice Making dimension as crucial in economics.
• It aims at obtaining maximum benefits with given resources.
• It is suitable in conditions of both scarcity and surplus.
• It takes in to account the present and future –Time dimension – Growth
dimension.
• It is relevant in the context of globalisation and sustainable development.

CONCLUSION
The evolution of the definition of economics has taken 235 years
• Adam Smith (1776) emphasized on wealth (Production Activity)
• Alfred Marshall (1890) focused on (Production and Consumption Activities)
• Lionel Robbins(1932) highlighted the problem of scarcity (Choices under
scarcity)
• Paul A Samuelson(1948) focused on production and consumption activities and
achieving growth under scarcity (choices under scarcity and growth)
• A.C. Dhas(2011) gave emphasis on choice making in maximizing production and
consumption benefits under scarce and surplus, and achieving growth (choices
under scarcity and surplus, and growth).
In sum, a review of all these definitions and their evolution indicate that
• The core of the economics is ‘Choices.’
• The fundamental economic activities are production and consumption.
• The aim of economics is optimizing given resources (both scarce and surplus) and
achieving growth.

II. METHODOLOGY OF ECONOMICS
It refers to techniques and procedures used in construction and verification of
economic principles. There are two methods:
1. Deductive Method
2. Inductive Method
Deductive Method - Deduction Means reasoning or inference from the general to the
particular or from the universal to the individual. The deductive method derives new
conclusions from fundamental assumptions or from truth established by other methods. It
involves the process of reasoning from certain laws or principles, which are assumed to be
true, to the analysis of facts. Then inferences are drawn which are verified against observed
facts. Bacon described deduction as a “descending process” in which we proceed from a
general principle to its consequences. Mill characterised it as a priori method, while others
called it abstract and analytical. Deduction involves four steps:
(1) Selecting the problem.
(2) Formulating Assumptions.
(3) Formulating Hypothesis
(4) Testing and Verifying the Hypothesis

Merits of Deductive Method
1. Simple
2. Useful for complex processes where cause & effect are mixed
3. Substitute for experimentation
4. Accurate and exact
Demerits of Deductive Method:
1. High competence required.
2. Unrealistic Assumption.
3. Not Universally Applicable

Inductive Method - Induction “is the process of reasoning from a part to the whole,
from particulars to generals or from the individual to the universal.” Bacon described
it as “an ascending process” in which facts are collected, arranged and then general
conclusions are drawn. Thus induction is the process in which we arrive at a
generalisation on the basis of particular observed facts.
The inductive method involves the following steps:
1. The Problem: In order to arrive at a generalisation concerning an economic
phenomenon, the problem should be properly selected and clearly stated.
2. Data: The second step is the collection, enumeration, classification and analysis
of data by using appropriate statistical techniques.
3. Observation: Data are used to make observation about particular facts concerning
the problem.
4. Generalisation: On the basis of observation, generalisation is logically derived
which establishes a general truth from particular facts.

Merits of Inductive Method
1. Realistic
2. Possibility of verification
3. Dynamic Approach
4. More suitable for economic problem
Demerits of Inductive Method:
1. Difficult
2. Danger of bias/Lacks concreteness.
3. Time consuming
4. Costly
5. Limited scope of verification

NATURE OF ECONOMICS
There is a great controversy among the economists regarding the nature of
economics, whether the subject ‘economics’ is considered as science or an art. If it is
a science, then either positive science or normative science.

ECONOMICS AS SCIENCE
‘Economics’ has several characteristics similar to science.
1. Economics is also a systematic study of knowledge and facts
2. Economics deals with the correlation-ship between cause and effect.
3. All the laws in economics are also universally accepted.
4. Theories and laws of economics are based on experiments.
5. Economics has a scale of measurement.
However, the most important question is whether economics is a positive science or
a normative science?
Positive science deals with all the real things or activities. It gives the solution
what is? What was? What will be? It deals with all the practical things. For example,
poverty and unemployment are the biggest problems in India.
Normative science deals with what ought to be? What ought to have happened?
Normative science offers suggestions to the problems. These statements give the
ideas about both good and bad effects of any particular problem or policy. For
example, illiteracy is a curse for Indian economy.

ECONOMICS AS ART
According to Т.К. Mehta, ‘Knowledge is science, action is art.’ According to Pigou,
Marshall etc., economics is also considered as an art. In other way, art is the
practical application of knowledge for achieving particular goals. Science gives us
principles of any discipline however, art turns all these principles into reality.
Therefore, considering the activities in economics, it can claimed be as an art also,
because it gives guidance to the solutions of all the economic problems.
1. Solution of problem
2. Verification of economic laws
Conclusion: From all the above discussions we can conclude that economics is
neither a science nor an art only. However, it is a golden combination of both.
According to Cossa, science and art are complementary to each other. Hence,
economics is considered as both a science as well as an art.

III. SCOPE OF ECONOMICS
The scope of economics means the area of the economics study. Economics can be
studied through a) Traditional Approach and (b) Modern Approach.
a) Traditional Approach: In the traditional approach, Economics is studied under five
major divisions namely:
1. Consumption.
2. Production.
3. Exchange.
4. Distribution.
5. Public finance.

SCOPE OF ECONOMICS
The scope of economics means the area of the economics study. Economics can be
studied through a) Traditional Approach and (b) Modern Approach.
a) Traditional Approach: In the traditional approach, Economics is studied under five
major divisions namely:
1. Consumption.
2. Production.
3. Exchange.
4. Distribution.
5. Public finance.

b) Modern Approach: In the modern approach, the study of economics is divided
into: i) Microeconomics and ii) Macroeconomics.
i. Microeconomics analyses the economic behaviour of any particular decision
making unit such as a household or a firm. Microeconomics studies the flow of
economic resources or factors of production from the households or resource
owners to business firms and flow of goods and services from business firms to
households. It studies the behaviour of individual decision making unit with
regard to fixation of price and output and its reactions to the changes in demand
and supply conditions. Hence, microeconomics is also called price theory.
ii. Macroeconomics studies the behaviour of the economic system as a whole or
all the decision-making units put together. Macroeconomics deals with the
behaviour of aggregates like total employment, gross national product (GNP),
national income, general price level, etc. So, macroeconomics is also known as
income theory.

• B. BASIC CONCEPTS & PRECEPTS:
I. ECONOMIC PROBLEMS,
II. ECONOMIC AGENTS,
III. ECONOMIC ORGANIZATIONS,
IV. MARGINALISM,
V. TIME VALUE OF MONEY,
VI. OPPORTUNITY COST

I. ECONOMIC PROBLEMS
The economic problem – sometimes called the basic or central economic problem
– asserts that an economy's finite resources are insufficient to satisfy all human wants
and needs. It assumes that human wants are unlimited, but the means to satisfy
human wants are limited. The economic problem is the problem of rational
management of resources or the problem of optimum utilization of resources. It arises
because resources are scarce and resources have alternative uses. Had there been
unlimited resources to satisfy unlimited wants, there would have been no economic
problem. But resources are scarce in relation to the demand of the people. Economic
problem is to match limited resources to unlimited wants and needs. Three questions
arise from this:
• What to produce? - - Problem of allocation of resources
• How to produce? – Problem of choice of technique
• For whom to produce? – Problem of Distribution

What to produce? - 'What and how much will you produce?' This question lies with
selecting the type of supply (Capital goods or consumer goods) and the quantity of
the supply, focusing on efficiency. e.g. "What should I produce more; laptops or
tablets?" The decision to produce one good will reduce the production of the other
goods. The economy has to decide based on the basis of importance of various
goods.
How to produce? This question deals with the assets and procedures used while
making the product, also focusing on efficiency. It is the problems of selection of
factor combination, labour intensive or capital intensive. The decision is made
considering the resources available with the country and the need of its economy. A
producer also considers prices and productivities of alternative factors. He chooses
that technique which economizes the use of scarce resources.
For whom to produce? - 'To whom and how will you distribute the goods?' and 'For
whom will you produce this for?' – whether to produce goods for more poor and less
rich or vice versa. Good are produced for those people who have paying capacity,
which depends upon their income.
Economics revolve around these fundamental economic problems.

II. ECONOMIC AGENT
The term agent is used in relation to principal–agent. It refers specifically to someone
delegated to act on behalf of a principal. In economics, an agent is an actor and more
specifically a decision maker in a model of some aspect of the economy. Economic
agents are actors who intervene the economy under certain rules determined by the
economic system and economic institutions. Typically, every agent makes decisions
by solving a well or ill-defined optimization or choice problem. In this process, they
mould the economy; for example, they decide the distribution of goods and services,
taxes, laws, tariffs, etc. Economic agents are any individuals, institutions or groups
of institutions that play a part in any economic circuit through their rational actions
and decisions. In general, economists consider three or four types of economic
agents:
1. Households (Consumers)
2. Firms (Producers)
3. Governments
4. Central Bank

i. Households - Ones who consume a produced good or service, generally by financial
purpose. They have a dual role in the economy. On one side, they are consumers, they
demand goods and services; and on the other, they own the means of production
through which the goods and services are produced.
ii. Firms - Economic agents whose role is to transform factors of production into goods and
services to sell. Firms use factors of production (land, labor, and capital) to produce goods
and services, creating value and wealth. They demand labor from families for a salary,
also they employ capital in exchange for an interest, and land for a rent. Finally, They
offer goods and services for the households, others firms or the government.
iii. Government – An economic agent which provides rules for how firms and consumers
should interact. Government offer goods and services (mostly public goods and services
like roads or national security) through national companies or in association with private
firms. Governments demand goods from firms and labor from households. They levy
taxes. They regulate prices, etc. They also distribute the wealth through social services in
education, health and poverty programs.
iv. Central Banks – Some economists also consider Central Banks as fourth economic agent.
Central Banks manage country currency, money supply, and interest rates. Through
monetary policies, they can increase the money supply in the economy or modify the
interest rates to incentivize or disincentivize consumption, savings or investments.

III. ECONOMIC ORGANIZATIONS
It refers to the way in which the means of production and distribution of goods are
organized, such as capitalism or socialism or a mixture of both.
Capitalism - In capitalist economies, governments play a minimal role in deciding
what to produce, how much to produce, and when to produce it, leaving the cost of
goods and services to market forces. Capitalism is based around a free market
economy, meaning an economy that distributes goods and services according to the
laws of supply and demand.
Socialism –In socialist economies, important economic decisions are not left to the
markets or decided by self-interested individuals. Instead, the government—which
owns or controls much of the economy's resources—decides the what, when, and
how of production. This approach is also called "centralized planning.“
Mixed – A mixed economy is variously defined as an economic system blending
elements of market economies with elements of planned economies, free markets
with state interventionism, or private enterprise with public enterprise.

IV. MARGINALISM
Marginalism generally includes the study of marginal theories and relationships
within economics. The key focus of marginalism is how much extra use is gained
from incremental increases in the number of goods created, sold, etc. and how these
measures relate to consumer choice and demand.
Marginalism covers such topics as marginal utility, marginal gain, marginal rates of
substitution, and opportunity costs, within the context of consumers making rational
choices in a market with known prices. These areas can all be thought of as popular
schools of thought surrounding financial and economic incentives.
One of the key foundations of marginalism is the concept of marginal utility. The
utility of a product or service is its usefulness in satisfying our needs. Marginal utility
extends the concept to the additional satisfaction derived from the same product or
service.

V. TIME VALUE OF MONEY
The time value of money (TVM) is the concept that money available at the present
time is worth more than the identical sum in the future due to its potential earning
capacity. The time value of money is the greater benefit of receiving money now
rather than later. It is founded on time preference. The principle of the time value of
money explains why interest is paid or earned: Interest, whether it is on a bank
deposit or debt, compensates the depositor or lender for the time value of money. It
also underlies investment. Investors are willing to forgo spending their money now if
they expect a favorable return on their investment in the future. TVM is also
sometimes referred to as present discounted value or future compounded value.
In TVM, we deal with four terms, interest rate, time period, future (compounding)
value, and present (discounting) value.
Interest - Interest is charge against use of money paid by the borrower to the lender
in addition to the actual money lent. It can be Simple vs. Compound Interest

Future Value - Future value is amount that is obtained by enhancing the value of a
present payment or a series of payments at the given rate of interest to reflect the time
value of money.
The formula is: A = P[1 + i]n
Where A = Future value of money,
P = Present value of money
i = interest rate
n = number of compounding periods per year
Present Value - When a future payment or series of payments are discounted at the
given rate of interest up to the present date to reflect the time value of money, the
resulting value is called present value.
P = A/(1+i)n
Application of Time Value of Money Principle - There are many applications of
time value of money principle. For example, we can use it to compare the worth of
cash flows occurring at different times in future, to find the present worth of a series
of payments to be received periodically in future, to find the required amount of
current investment that must be made at a given interest rate to generate a required
future cash flow, etc.

VI. OPPORTUNITY COST
As our resources are limited, we are always forced to make choices between alternate
commodities. The amount of goods and services that must be sacrificed to obtain
more of any good is called the opportunity cost of that good. Opportunity cost is also
known as alternate cost. To sum up,
• It is the value of the second best alternative forgone.
• It is the benefit that is lost in making a choice between two competing uses of
scarce resources.
• It is the amount of other product that must be forgone or sacrificed to produce a
unit of a product.
Example- You are working in bank at salary of Rs 40000 a month. You receive two
more job offers:
To work as an executive at Rs 30000 a month
To work as a journalist at Rs 35000 per month
The OC of working in a bank is Rs, 35000.

Basic Elements - In brief, we can divide the concept of opportunity cost into three
components:
1. Foregone alternatives - Opportunity cost involves alternatives which you have
to forgo while preferring some particular choice. Every foregone option has
some value; monetary or otherwise.
2. Highest valued - You could have a number of alternatives to decide on the
allocation of your resources. All alternatives involve some value, but all can’t be
counted as opportunity cost. Only the highest valued alternative is considered.
3. Pursuit of an Activity - It is not only a decision to forgo the highest value of the
next alternative but also to allocate your resources in pursuit of a particular
choice
Importance - Many trade-off concepts such as Production Possibility curve,
indifference curve, isoquant, Phillips curve, etc. are based on opportunity cost
reasoning.

• C. FORMS OF ECONOMIC ANALYSIS:
I. MICRO VS. MACRO,
II. PARTIAL VS. GENERAL,
III. STATIC VS. DYNAMIC,
IV. POSITIVE VS. NORMATIVE,
V. SHORT RUN VS. LONG RUN.

I. MICROECONOMICS VS. MACROECONOMICS
Micro economics involves
• Supply and demand in individual markets.
• Individual consumer behaviour. e.g. Consumer choice theory
• Individual labour markets – e.g. demand for labour, wage determination.
• Externalities arising from production and consumption. e.g. Externalities
Macro economics involves
• Monetary / fiscal policy. e.g. what effect does interest rates have on the whole
economy?
• Reasons for inflation and unemployment.
• Economic growth
• International trade and globalisation
• Reasons for differences in living standards and economic growth between
countries.
• Government borrowing.

II. PARTIAL VS. GENERAL EQUILIBRIUM ANALYSIS
Partial equilibrium is a condition of equilibrium in the theory of economics which
takes into consideration only a part of the market to attain the equilibrium. It
studies the effect of one variable upon the other without considering the effect of
other factors. For example, law of demand is studied in relationship with price by
keeping all other factors constant.
General equilibrium is the equilibrium that studies an economic phenomenon by
taking all the aggregate units in the economy into consideration. For example,
product prices make demand for each commodity equal to its supply and factor
prices make the demand for each factor equal to its supply so that all product
markets and factor markets are simultaneously in equilibrium.

For example, in this image, we have attained equilibrium in the demand and supply
of all the markets.
For example, in this image, we have attained equilibrium in the demand and supply
of automobiles and agriculture, but not the toys or shoes markets.

III. STATIC VS. DYNAMIC ECONOMIC ANALYSIS
Static Economic Analysis - Static theory studies concepts of no change, i.e. it does
not have any time dimension. Static economic analysis denotes the relationship
between two economic variables that relate to the same point of time. Static
analysis does not show the path of change. It only tells about the conditions of
equilibrium. Static economics studies only a particular point of equilibrium. Static
analysis is based on the unrealistic assumptions of perfect competition, perfect
knowledge, etc. Here all the important economic variables like fashions, population,
models of production, etc. are assumed to be constant. So, it is far from reality.
Dynamic Economic Analysis – Dynamic theory studies concepts which observe
change, i.e. it has time dimension attached to it. Dynamic economic analysis also
shows the path of change. Dynamic economics also studies the process by which
equilibrium is achieved. As a result, there may be equilibrium or may be
disequilibrium. Dynamic analysis takes the economic variables as changeable. So, it
is much nearer to reality.

DIFFERENCE BETWEEN STATIC AND DYNAMIC ECONOMY
1. Time Element - In static economic analysis time element has nothing to do. In
static economics, all economic variables refer to the same point of time. Static
economy is also called a timeless economy. On the contrary, in dynamic
economics, time clement occupies an important role. Here all quantities must
be dated. Economic variables refer to the different points of time.
2. Process of Change - Another difference between static economics and dynamic
economics is that static analysis does not show the path of change. It only tells
about the conditions of equilibrium. On the contrary, dynamic economic
analysis also shows the path of change. Static economics is called a ‘still picture’
whereas the dynamic economics is called a ‘movie’ of the market.
3. Equilibrium - Static economics studies only a particular point of equilibrium. But
dynamic economics also studies the process by which equilibrium is achieved.
As a result, there may be equilibrium or may be disequilibrium. Therefore, static
analysis is a study of equilibrium only whereas dynamic analysis studies both
equilibrium and disequilibrium.
4. Study of Reality - Static analysis is far from reality while dynamic analysis is
nearer to reality.

IV. POSITIVE VS. NORMATIVE ECONOMICS
Positive Economics – It is a stream of economics that focuses on the description,
quantification, and explanation of economic developments, expectations, and
associated phenomena. It relies on objective data analysis, relevant facts, and
associated figures. Positive economics is objective and fact-based where the
statements are precise, descriptive, and clearly measurable. These statements can be
measured against tangible evidence or historical instances. There are no instances of
approval-disapproval in positive economics.
Normative Economics – It focuses on the ideological, opinion-oriented, prescriptive,
value judgments, and "what should be" statements aimed toward economic
development, investment projects, and scenarios. Normative economics is subjective
and value-based, originating from personal perspectives, feelings, or opinions
involved in the decision-making process. Normative economics statements are rigid
and prescriptive in nature. They often sound political or authoritarian, which is why
this economic branch is also called "what should be" or "what ought to be"
economics.

V. SHORT RUN VS. LONG RUN ECONOMIC ANALYSIS
The short run as a constraint differs from the long run. In the short run, leases,
contracts, and wage agreements limit a firm's ability to adjust production or wages to
maintain a rate of profit. In the long run, there are no fixed costs; costs find balance
when the combination of outputs that a firm puts forth results in the sought after
amount of the goods at the cheapest possible price.
The short run is a concept that states that, within a certain period in the future, at least
one input is fixed while others are variable. In economics, it expresses the idea that an
economy behaves differently depending on the length of time it has to react to certain
stimuli. The short run does not refer to a specific duration of time but rather is unique
to the firm, industry or economic variable being studied.
A key principle guiding the concept of the short run and the long run is that in the
short run, firms face both variable and fixed costs, which means that output, wages,
and prices do not have full freedom to reach a new equilibrium.

• D. RELATION BETWEEN ECONOMICS
AND LAW:
I. Economic Offences
II. Economic legislations

I. ECONOMIC OFFENCES
Economic offences form a separate category of crimes under Criminal offences. These
are often referred as White/Blue Collar crimes. People belonging generally to upper
economic status are found involved in such crimes with the help of some
unscrupulous and corrupt Government functionaries and advanced technology.
Economic offences not only inflict pecuniary losses on individuals but also damage
the national economy and have security implications as well. The offences of
Smuggling of Narcotic substances, Counterfeiting of currency and valuable securities,
Financial Scams, Frauds, Money Laundering and Hawala transactions etc. evoke
serious concern about their impact on the National Security.

There are certain striking features of economic offences that differentiate the same
from other kinds of crimes. These characteristics are as follows:
i. An economic offence needs to have the required actus reus and mens rea before
the commission or omission of the act.
ii. The intention behind committing an economic offence is to have some kind of
material advantage or to avoid or reduce some kind of material loss. The motive
can also be of causing some kind of a material loss to the third party with
complete knowledge of such loss.
iii. Economic offences generally imply the existence of certain elements like a
breach of trust, deception or cheating.
iv. Economic offences generally don’t involve any kind of physical harm caused by
its commission.
v. This kind of crime is mostly committed by the privileged or the upper-class
section of the society, who have access to such economic or business activities as
well as the required resources.

II. ECONOMIC LEGISLATIONS
Most governments in the world today regulate the affairs of private businesses with
the intent of protecting consumers, small businesses, and the overall health of their
economies. This regulation is based on a variety of economic legislation, or laws
concerning the economy, passed primarily since the late nineteenth century.
The various measures are taken by the government to control and regulate the private
sector to bring its activities in alignment to economic goals. The main aim of these
measures is to attain economic growth, economic stability, and equitable employment.
However, there are certain socio-economic problems that always exist in the
economy. These socio economic problems include growth of monopolies, labor
exploitation, and unethical trade practices.
Therefore, the government has enacted certain acts and laws known as economic
legislations to cope with these socio-economic problems.

A table listing various Economic Offences, the relevant legislations and concerned
Enforcement Authorities is given below.

Features of Economic Laws:
• Economic laws depict the activities of economic units in response to various
causes or forces. These laws explain generalizations about human behaviour,
which express relationship between a cause and effect. Like other natural
sciences, causes may be laid down in the form of imaginary conditions or they
may be drawn from observed facts or a mixture of the two. Since they deal with
the behaviour of the human beings as members of the society, they are a part of
social laws.
• Economic laws are supposed to govern or explain economic activities, i.e.,
activities which correspond to that part of human behaviour, where the main
motive is economic.
• Economic laws are less accurate and lack preciseness and universal applicability.
• The aim of economics, like all other sciences, should be to develop laws or
generalizations or principles to understand the past and offer trustworthy
guidance for the future.

Government Laws
The government laws are the laws passed by the parliament. These are based on
social norms and customs. They involve a lengthy procedure of framing having legal
implications. These are associated with maintaining law and order in the society.
They are binding on all individuals. Any person violating these laws is liable to be
punished by the government.
Comparison between Economic and Government Laws
The comparison between economic and government laws can be illustrated on
various criteria like origin/basis, universality, predictions, implications, precision,
change, formulating agency, impact on individual, transgression/sanction.

RELATION BETWEEN ECONOMICS AND LAW
Law consists of rules made by the authority for proper regulation of the community
or society. It refers to those rules which are laid by the status for determining the
relationship of men in the organized society. The purpose of law is to regulate and
control human actions in the society.
The relationship between law and economics is a mutual one. Both influence each
other. The mode of economy determines the nature of laws and the status of the
adjudicating bodies and legal professional. This shows as to how the economy can
influence law. On the other hand, various legislations passed by the government bring
new dimensions in economy. For instance, social cost, etc.
A good law always encourages economic development and a bad law inhibits it. Law
imparts trust in actual government procedure and provides security to the society.
This is done through an appropriate system of property right, contracts and extra
contractual liability, which can generate efficient use of resources.

UNIT-II: DEMAND, SUPPLY, PRODUCTION ANALYSIS AND COST
A. Theory of Demand and Supply, Price Determination of a
Commodity, Shift of Demand and Supply, Concept of
Elasticity
B. Concepts of Production: Total Product, Average Product,
Marginal Product, Returns to Factor, Returns to Scale
C. Costs and Revenue Concepts

A.
I. Theory of Demand and Supply
II. Price Determination of a Commodity,
III. Shift of Demand and Supply,
IV. Concept of Elasticity

DEMAND DEFINITION:
• The quantity of a product consumers are willing and able to buy at different
prices in a specified time period.
FACTORS AFFECTING DEMAND:
• Price of Product
• Income of Consumer
• Price of Related Goods
• Substitute Goods
• Complementary Goods
• Tastes and Preferences
• Consumer’s expectation of future Income and Price
• Growth of Economy
• Seasonal conditions
• Population
I. THEORY OF DEMAND AND SUPPLY

DEMAND SCHEDULE
• It shows the price and quantity relationship.
• Tabular representation of price and demand.

DEMAND CURVE
• The geometrical representation of demand schedule is called
the demand curve.

LAW OF DEMAND
The quantity demanded of a good falls with increase in price and the quantity
demanded of a good rises with fall in price, ceteris paribus (other things being
equal).
Assumptions:
1. Price of related goods should not change.
2. Income of the consumer should not change.
3. Taste and preferences should not change.
4. No change in price in future.

DEMAND FUNCTION
• When we express the relationship between demand and its
determinant mathematically, the relationship is known as
demand function.
• The demand for product X can be written in
functional form as-
Dx= f (Px, Y, Po, T, E, N )

Why the demand curve slope downwards?
• Law of diminishing marginal
utility.
• Income effect.
• Substitution effect.
• New consumers.
• Multiple use of commodity.

EXCEPTIONS TO THE LAW OF DEMAND
• Inferior Goods
• Snob Appeal
• Demonstration Effect
• Future Expectation of Prices
• Insignificant proportion of income spent
• Goods with no Substitutes

MOVEMENT ALONG DEMAND CURVE

• Movement along the demand curve refers to extension and contraction in
demand. Both are caused by change in own price of the commodity.
• Extension in demand refers to increase in quantity demanded due to fall in own
price of the commodity. Extension of demand also called expansion in
demand.
• Contraction in demand refers to decrease in quantity demanded due to rise in
own price of the commodity.

SHIFT OF DEMAND CURVE

THEORY OF SUPPLY
• Supply is the willingness and ability of sellers to produce and offer to sell
different quantities of a good at different prices during a specific time
period. Quantity supplied is the number of units of a good produced and
offered for sale at a specific price.
• The law of supply states that as the price of a good increases, the quantity
supplied move in the same direction, giving them a direct relationship. As
one factor rises, the other rises too.
• A supply schedule is a numerical chart that illustrates the law of supply.
• A supply curve is a graph that shows the amount of a good that sellers
are willing and able to sell at various prices.

II. PRICE DETERMINATION - EQUILIBRIUM
• Quantity Demanded = Quantity Supplied
• Plans of buyers and sellers match – Market clears
• No pressure on price to move up or down
• Equilibrium point – Equilibrium Price & Equilibrium Quantity

III. SHIFT OF DEMAND & SUPPLY CURVES

NEW EQUILIBRIUM – SUPPLY CURVE SHIFTS

When the demand and supply
curves shift in the same direction,
equilibrium quantity also shifts in
that direction. The effect on
equilibrium price depends on
which curve shifts more. If the
curves shift in opposite directions,
equilibrium price will move in the
same direction as demand. The
effect on equilibrium quantity
depends on which curve shifts
more.

IV. ELASTICITY OF DEMAND
Elasticity of demand is defined as the responsiveness of the quantity of a good to
changes in one of the variables on which demand depends-
• Price of the commodity
• Income of the Consumer
• Various other factors
• If the price rises by 10% - what happens to demand ?
• We know demand will fall – by more than 10%? By less than 10%?
• Elasticity measures the extent to which demand will change.

The responsiveness of quantity demanded to change in price is called Price
Elasticity of demand .
Formula:
PRICE ELASTICITY OF DEMAND

Unit Elastic Demand: Elasticity Equals 1

Inelastic Demand: Elasticity Is Less Than 1

Elastic Demand: Elasticity Is Greater Than 1

Slope and Elasticity
• Slope and elasticity are not the same thing.
• Slope measures how the quantity demand changes when
the price changes.
• Slope depends on the units of measurement of price and
quantity.
• Slope cannot be used to compare the demands of different
goods.

The elasticity decreases
along a linear demand
curve as the price falls.
ELASTICITY ALONG A LINEAR DEMAND CURVE

ELASTICITY – TOTAL REVENUE
• Total Revenue is the amount spent on a good and received by its sellers
and equals the price of the good multiplied by the quantity of the good
sold.
• A method of estimating the price elasticity of demand by observing the
change in total revenue that results from a price change is called the total
revenue test.
• If demand is elastic, a given percentage rise in price brings a larger
percentage decrease in the quantity demanded and total revenue
decreases.
• If demand is inelastic, a given percentage rise in price brings a smaller
percentage decrease in the quantity demanded and total revenue
increases.

TOTAL REVENUE TEST
• If price and total revenue change in the opposite directions,
demand is elastic.
• If a price change leaves total revenue unchanged, demand is
unit elastic.
• If price and total revenue change in the same direction,
demand is inelastic.

INCOME ELASTICITY
• The degree of responsiveness of the demand for the commodity
to a change in the income of the consumer.
• It is defined as Ratio of percentage change in the quantity demanded of a
commodity to the percentage change in the income of consumer.

CROSS ELASTICITY

FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
• Nature of Commodity
• Availability of Substitutes
• Income Level
• Level of Price
• Postponement of Consumption
• Number of Uses
• Share in Total Expenditure
• Time Period

B. Concepts of Production:
I. Total Product,
II. Average Product,
III. Marginal Product,
IV. Returns to Factor,
V. Returns to Scale

PRODUCTION FUNCTION
• The basic relationship between the factors of production and the output
is refered to as a Production Function.
• The firm’s production function for a particular good (q) shows the
maximum amount of the good that can be produced using alternative
combinations of capital (K) and labour (L).
q = f(K,L)

I. TOTAL PRODUCT
The Total Product Curve shows the maximum output attainable from a
given amount of a fixed input (capital) as the amount of the variable input
(labor) is changed.

II. AVERAGE PRODUCT
AVERAGE PRODUCT: Average product is an average measure of input
productivity, i.e., output per unit of input, or (output / input).
APL = Q/L
TO TAL AVERAGE
LABO R PRO DUCT PRO DUCT
0 0
1 3 3.00
2 15 7.50
3 36 12.00
4 48 12.00
5 56 11.20
6 62 10.33
7 66 9.43
8 68 8.50

The average product curve shows the average product of
an input as a function of the amount of input used.

III. MARGINAL PRODUCT
MARGINAL PRODUCT: The change in output per unit change in input.
Marginal product is the slope of the total product curve:
Q/ L

The marginal product curve shows the marginal product as a
function of the quantity of labor used.

There is an important relationship between average product and marginal
product of an input:
1) When AP is rising, MP is greater than AP,
2) When AP is falling, MP is less than AP.
3) When AP is constant (neither rising nor falling), MP equals AP.

IV. RETURNS TO FACTOR
The laws of returns are categorized into two types.
• The Law of Returns to Factor) seeking to analyze production in the short
period.
• The Law of Returns to Scale seeking to analyze production in long period.
Returns to Factor
• The law of Returns to Factor operates in the short period. It explains the
production behavior of the firm with one factor variable while other factors
are kept constant.
• It is also known as Law of Diminishing Returns/Law of Variable Proportions.
• According to Samuelson,” An increase in some inputs relative to other fixed
inputs will in a given state of technology cause output to increase, but after
a point, the extra output resulting from the same addition of extra inputs
will become less”.

THREE STAGES OF THE LAW OF VARIABLE PROPORTION ARE:
1. STAGE OF INCREASING RETURN – In this stage as a variable
resource (labor) is added to fixed inputs of other resources, the total
product increases up to a point at an increasing rate as shown in graph.
2. STAGE OF DIMINISHING RETURN – In stage 2, the total production
continues to increase at a diminishing rate until it reaches its maximum
point (H) where the second stage ends .In this stage both marginal product
(MP) and average product of the variable factor are diminishing but are
positive.
3. STAGE OF NEGATIVE RETURNS – In the third stage, the total
production declines. The TP, curve slopes downward ( from point H
onward) . The MP curve falls to zero at point L2 and then it is negative. It
goes below to the x-axis with the increase in the use of variable factor
(labor).

V. RETURNS TO SCALE
• The law of returns to scale operates in the long period.
• It explains the production behavior of the firm with all variable
factors.
• The law of returns to scale describes the relationship between
variable inputs and output when all the inputs or factors are
increased in the same proportion.
• There are three stages of Returns to Scale:
1. Increasing Returns to Scale
2. Constant Returns to Scale
3. Diminishing Returns to Scale

1. INCREASING RETURNS TO SCALE- If the output of a firm
increases more than in proportion to an equal percentage increase in all
inputs, the production is said to be exhibit increasing returns to scale.
2. CONSTANT RETURNS TO SCALE – When all inputs are increased
by a certain percentage, the output increases by the same percentage, the
production function is said to be exhibit constant returns to scale.
3. DIMINISHING RETURNS TO SCALE – The term ‘diminishing’
returns to scale refers to scale where output increases in a smaller
proportion then the increase in all inputs.
For example, if a firm increases inputs by 100% but the output decreases
by less than 100%, the firm is said to be exhibit decreasing returns to
scale.

ECONOMIES OF SCALE
Economies of scale are benefits and advantages of a firm as it expands its
production. Economies of scale reduces the average cost.
INTERNAL ECONOMIES – Happen inside an organisation.
1. Labour Economies.
2. Managerial Economies.
3. Marketing Economies.
4. Technical Economies.
5. Risk bearing Economies.
6. Transport and Storage Economies.
EXTERNAL ECONOMIES – Advantages of the industry as a whole.
1. Economies of Government Action.
2. Economies of Concentration.
3. Economies of Information.
4. Economies of Marketing.

Diseconomies of scale are the forces that cause larger firms and governments to
produce goods and services at increased per- unit costs. The concept is the
opposite of economies of scale.
INTERNAL DISECONOMIES
1. Managerial Inefficiency
2. Labour Inefficiency
EXTERNAL DISECONOMIES
1. Breakdown of relationship with buyers and suppliers.
2. Competition for Labour
3. Increasing employment costs.
4. Traffic congestion.
DISECONOMIES OF SCALE

C. COST AND REVENUE CONCEPTS
Cost Concept
COST FUNCTION - It is used for analyzing the cost of a project in short and long
run. It refers to the functional relationship between coSt and output.
C = f (q)
where C = cost of production,
q = quantity of output,
f = functional relationship
DIFFERENT COST CONCEPTS:
1. Explicit Cost and Implicit Cost
2. Opportunity Cost and Actual Cost
3. Direct Cost and Indirect Cost
4. Historical Cost and Replacement Cost
5. Fixed Cost and Variable Cost
6. Total, Average and Marginal Cost

1. EXPLICIT COST & IMPLICIT COST - Explicit Cost is actual money
expenditure or input or payment made to outsiders for hiring their factor
services. Implicit Cost is the estimate value of inputs supplied by the owners
including normal profit.
2. OPPORTUNITY COST & ACTUAL COST – Opportunity Cost is the cost
incurred for loosing next best alternative. Actual Cost is an actual amount paid
or incurred, as opposed to estimated cost or standard cost.
3. DIRECT COST & INDIRECT COST - Direct cost is that cost that have
directly accountable to specific cost object such as a process or product, eg.
Salary, raw material, etc. Indirect cost is that cost which is not directly
accountable to specific cost object or not directly related to production, eg.
insurance, etc.
4. HISTORICAL COST & REPLACEMENT COST - Historical cost refers to
the original (actual) cost incurred at the time the asset was acquired The
replacement cost is the price that an entity would pay to replace an existing
assets at current market price that may not be market value of that asset.

5. FIXED COST & VARIABLE COST - Fixed cost is the cost that remains
unchanged irrespective of the output level or sales revenue such as interest,
rent, salaries etc. Variable cost are those costs that vary depending on a
company’s production volume; they raise as production increases and fall as
production decreases.

5. TOTAL, AVERAGE & MARGINAL COST – These concepts
are further divided into:
Total Cost
• Total fixed cost (TFC)
• Total variable cost (TVC)
• Total cost (TC)
Average Cost
• Average fixed cost (AFC)
• Average variable cost (AVC)
• Average cost (AC)
Marginal Cost
• Marginal cost (MC)

TOTAL FIXED COST (TFC) - It refers to those costs which do not vary directly
with the level of output. For example :- rent, interest, salary, insurance premium etc.
• TFC = TC - TVC
• TFC = AFC * OUTPUT
• TFC = TC AT 0 OUTPUT.
TOTAL VARIABLE COST (TVC) - It refers to those cost which vary directly
with the level of output. For example :- payments of raw material ,power, fuel,
wages, etc.
• TVC = TC – TFC
• TVC = AVC * OUTPUT
• TVC = 𝑀𝐶
TOTAL COST - It is the total expenditure incurred by a firm on the factor of
production required for the production of a commodity.
• TC = TVC + TFC
• TC = AC * OUTPUT

AVERAGE FIXED COST (AFC) - It refers to per unit of total fixed cost.
• AFC = TFC / OUTPUT
• AFC = AC – AVC
AVERAGE VARIABLE COST (AVC) - It refers to per unit of total variable cost.
• AVC = TVC / OUTPUT
• AVC = AC - AFC
AVERAGE TOTAL COST (AC)- It refers to the per unit total cost of production.
• AC = TC / OUTPUT
• AC = AVC+AFC

MARGINAL COST (MC)
It refers to addition to total cost when one more unit of output is produced.
• MC= Δ𝑇𝐶/Δ𝑄
• MCn = TCn – TCn-1
• MCn = TVCn – TVCn-1

REVENUE CONCEPT
Revenue is the money payment received from the sale of a
commodity.
Types of Revenue
1. Total Revenue
2. Average Revenue
3. Marginal Revenue

1. TOTAL REVENUE – Total Revenue (TR) is defined as the total or
aggregate of proceeds to the firm from the sale of a commodity. Symbolically,
TR = P X Q
where P = Price & Q = Quantity
2. AVERAGE REVENUE - Average Revenue (AR) is the revenue per unit of
output sold. Symbolically,
AR = TR /Q or,
AR = P X Q or,
AR = P
AR is always identical with the price.
3. MARGINAL REVENUE - Marginal Revenue (MR) is the revenue received
by selling one extra unit of output. Marginal Revenue is the addition made to
total revenue when one more unit of output is sold.
MR = Change in Total Revenue
Change in Quantity Sold
MR = ΔTR ΔQ
Also, MRn = TRn – TRn-1

FIRM’S REVENUE CURVES UNDER PERFECT COMPETITION
• It is a market situation where a firm is a price taker.
• There are so many buyers and sellers in the market that no
individual buyer or seller can influence the price of a commodity.
• Any variation in the output supplied by a single firm will not
affect the total output of the industry.
• No individual buyer can influence the price of the commodity by
his decision to vary the amount that he would like to buy.
• Price in perfect competition market is determined by the free play
of the market demand and supply curve.

RELATIONSHIP BETWEEN TR, AR, MR UNDER
PERFECT COMPETITION
1. TR is a straight positively sloping line from the origin. TR increases in
the same proportion as increase in output sold.
2. AR is horizontal line parallel to x-axis. It coincides with the price line
or the demand curve i.e. AR = P = d.
3. MR is also a horizontal line parallel to x-axis. Since AR is constant
MR is also constant. MR curve coincides with the AR curve such that
P= d = AR = MR.

FIRM’S REVENUE CURVES UNDER IMPERFECT COMPETITION
• It is a market situation where a firm is a price maker.
• In such a market, a firm is able to sell more only by reducing the
price of the product.
• Price in imperfect competition market is determined by the firms
itself.

RELATIONSHIP BETWEEN TR, AR, MR UNDER
IMPERFECT COMPETITION
1. When TR increases at a decreasing rate, MR is declining but has
positive value.
2. TR is maximum when MR = 0.
3. TR starts to decline when MR is negative.
4. The rate of fall in MR is twice to that of AR.

UNIT-III: MARKET STRUCTURE, THEORY OF
DETERMINATION OF FACTOR PRICES
A. Classification of Markets: Pure and Perfect Competitions,
Monopolistic and Imperfect Competition, Monopoly, Duopoly
and Oligopoly, Cartels
B. Dumping: Meaning, Types, Importance and Impact of Dumping
C. Wage determination, Rent, Interest and Profits

A. Classification of Markets:
I. Pure and Perfect Competition,
II. Monopolistic and Imperfect Competition,
III. Monopoly,
IV. Duopoly and Oligopoly,
V. Cartels.

MARKET
• In common language, market means a place where goods are purchased.
• However, in economics, market means an arrangement which establish
effective relationship between buyers and seller of a commodity. Hence,
each commodity has its own market.
• Market is an arrangement which links buyers and sellers.
• Market does not refer to a particular place or location.
• A market can be of different types. The market differ from one another
due to differences in the number of buyers, number of sellers, Nature of
the product, influence over price, availability of information, conditions
of supply etc.
• Economists discuss four broad categories of market structures:
• Perfect Competition
• Imperfect Competition
• Monopoly

CLASSIFICATION OF MARKET STRUCTURE

PERFECT COMPETITION MARKET: It refers to a market situation in which there
are large number of buyers and sellers of homogeneous products. The price of the product is
determined by industry with the forces of demand and supply. Thus, perfect competition in
a market structure is characterized by the complete absence of rivalry among individual
firms.
FEATURES OF A PERFECTLY COMPETITIVE MARKET:
1. Large Number of Buyers - Number of buyers is so large that each is demanding only a
small part of the total market supply and is not in a position to influence the price.
2. Large Number of Sellers - Number of sellers is so large that no individual firm can
affect the price.
3. Homogeneous Products - The second assumption of perfect competition is that all
sellers sell homogeneous (identical) product.
4. Free Entry or Exit of Firms - In the long run, under perfect competition, firm can enter
into or exit from the industry without any restriction.
5. Profit Maximization :- The goal of all firms is maximization of profit.
6. No Government Regulation :- There is no Government intervention in the market.
I. PERFECT COMPETITION

5. Perfectly Elastic Demand Curve - Demand curve reflected by AR curve facing firm
under perfect competition is perfectly elastic. Since price is uniform and given under
perfect competition, both AR(price) and MR become equal. Thus, AR and MR curves
coincide and become parallel to output axis.
6. Perfect Knowledge - In a perfectly competitive market, the firms and the buyers
possess perfect information about the market. It implies that no buyer or firm is ignorant
about the price prevailing in the market.
6. Perfect Mobility of Factors of Production - In a perfectly competitive market, the
factors of production are completely mobile leading to factor-price equalization
throughout the market.
7. Absence of Selling And Transportation Costs -Under perfect competition, there are no
selling costs. Also, there shall not be any cost of transport between sellers. Only then,
the firms under perfect competition can charge uniform price.
Pure versus Perfect Competition: Like under perfect competition, under pure competition
also the competitive firm is price taker. However, under pure competition, three features of
perfect competition are absent, namely:
1. Perfect Knowledge,
2. Perfect mobility of factors of production, and
3. Absence of Selling and Transportation Costs.

PRICE TAKER
• Under perfect competition, the price is determined by the industry.
• It is due to the fact that there are large number of buyers and sellers of
homogeneous products under perfect competition.
• No single seller by changing his supply can influence the Price.
• In perfect market conditions (also called perfect competition), a firm is a
price taker because other firms can enter the market easily and produce a
product that is indistinguishable from every other firm's product.
• This makes it impossible for any firm to set its own prices.
• Average and marginal revenue curve for price takers coincide.

• In a perfectly competitive market, the market demand curve is a downward
sloping line, reflecting the fact that as the price of an ordinary good increases,
the quantity demanded of that good decreases.
• Price is determined by the intersection of market demand and market supply;
individual firms do not have any influence on the market price in perfect
competition.
• Once the market price has been determined by market supply and demand
forces, individual firms become price takers.
• Individual firms are forced to charge the equilibrium price of the market or
consumers will purchase the product from the numerous other firms in the
market charging a lower price (keep in mind the key conditions of perfect
competition).
• The demand curve for an individual firm is thus equal to the equilibrium price of
the market.

The perfect competitive firms are price takers that accept the ruling market
(industry) price and sell each unit at the same price. AR = MR.

PROFIT MAXIMISATION UNDER
PERFECT COMPETITION
• Under conditions of perfect competition, the MR curve of a firm coincides with
its AR curve.
• The MR curve is horizontal to the X-axis because the price is set by the market
and the firm sells its output at that price.
• The firm is, thus, in equilibrium when MC = MR = AR (Price).
• The equilibrium of the profit maximisation firm under perfect competition is
shown in given figure where the MC curve cuts the MR curve first at point A.
• It satisfies the condition of MC = MR, but it is not a point of maximum profits
because after point A, the MC curve is below the MR curve. It does not pay the
firm to produce the minimum output when it can earn larger profits by
producing beyond OM.

Economics-I (BALLB 207)

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Economics-I (BALLB 207)