Microeconomics BBA Chapter-1,2&3

Microeconomics
Department Of Business Administration

(BBA Program), Batch- 22
Dhaka City College, Dhaka.
COURSE TITLE: MICRO ECONOMICS (510117)

Jannatul Ferdoushi BATCH-22nd (ALL SECTIONS) (12.6.2021)
Assistant professor,
Department of Economics,
Dhaka City College, Dhaka Chapter- 1,2&3;
Lecture -1
Microeconomics
(BBA Program)
Jannatul Ferdoushi
Department of Economics, Chapter- 1; Lecture -1
Dhaka City College, Dhaka
Economics: Definition
 The word ‘Economics’ was derived from two Greek words, oikos (a
house) and nemein (to manage) which would mean ‘managing an
household’
 “Economics is a social science that studies the human behavior about
the ways in which people use or manage limited resources to satisfy
their unlimited wants”.
 Several economists have defined economics taking different aspects
into account.
 The Classical View of Economics:
“Wealth Definition” by Adam Smith (1723 - 1790), Father of Economics :
Book : “An Inquiry into Nature and Causes of Wealth of Nations” (1776) .
Adam Smith defined economics as the science of wealth. According to Adam
Smith, economics makes inquiries into the factors that determine the wealth
and growth of a nation. So to Adam Smith what forms the subject matter of
economics is the production and expansion of wealth.
Definition of Economics….cont
 The Neo- Classical View of Economics
“ Welfare Definition” by Alfred Marshall (1842 - 1924):
Book: “Principles of Economics” (1890)
“Political Economy or 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 the material requisites of well
being”.
 Wealth was regarded not as an end in itself but a means to an end because
it was seen as the source of human welfare.
 “Scarcity and Choice Definition” by Lionel Ribbons:

Book “An Essay on the Nature and Significance of Economic Science” (1932).
According to him, “economics is a science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses” Ends –
human wants, Means – resources with which wants are fulfilled.
• “Growth Definition” by Paul Samuelson:
The present trend in the world is the establishment of welfare states and improvement
in the standard of living through reduction in poverty, unemployment and income
inequality. In line with this trend Samuelson has given a definition of economics based
on growth aspects.
“Economics is the study of how men and society chose, with or
without the use of money, to employ scarce productive resources
which could have alternative uses, to produce various
commodities over time and distribute them for consumption now
and in future amongst various people and groups of society”.
• From the above discussion, we summarize as

People’s desires are unlimited, but resources are limited, therefore
individuals must make trade-oﬀs among their choices. Economics
is the social science that examine how these trade-oﬀs are best
made to satisfy their wants given the resources constraint.
The Scope of Economics
• Economics as a subject is experiencing continuous growth.
The frontier of the subject has been much widened.
Virtually every major problem facing the world today, from
global warming to world poverty, to the world political
conflicts has an economic dimension. It is hard to overstate
the scope of applicability of economics in all the sphere of
life because of the prevalence of scarcity and choice trade-
off issues in almost all human activities. A discussion on
the scope of economics includes the
Microeconomics and Macroeconomics,
Whether economics is an art or a science
Whether it is a positive or a normative science and
Different fields that economics studies
Scope of Economics……………Cont.
 Microeconomics: Microeconomics is the branch of
economics that examines the economic behavior of the
individual unit, may be a person, a particular household, or a
particular firm. It is a study of one particular unit rather than
all the units combined together. Microeconomics is also
described as price and value theory, the theory of the
household, the firm and the industry.
 Macroeconomics: Macroeconomics is the branch of
economics that examines the economic behavior of not one
particular unit, but of all the units combined together.
Macroeconomics is a study in cumulative. Hence it is often
called Aggregative Economics. National income,
employment, inflation, Fiscal and Monetary policy etc.
come under it’s purview.
Economics is an art or a science?:
 Economics is science in the sense, it is a systematic
knowledge derived from scientific study, observation
& experiments based on scientific methods.
 Economics is an art too because an art is a system of
rules for the attainment of given end. There are
several branches of economics which provide
practical guidance in the solution of economic
problem.
 Its is a science in its methodology and an art in its
application.
 Economics as a positive or a normative science:
 Positive Science:
 A positive science is concerned with what is. According to Robbins,
economics is a science of what is which is not concerned with moral or
ethical questions.
 The positive science of economics makes it devoid of value or ethical
judgment, that is, it relates and describes facts without saying whether
they are good or bad.
 For instance, Positive economics make statements such as ‘Growth
creates pollution’ or ‘Growth may results inequality’ or ‘Demand falls
with price rise’ or about how price levels and national income are
determined, etc. But it does not go into the question of what should the
prices be, what should be the savings rate, or whether growth is good
or bad etc.
 As Economics makes assertion about economic behavior, it is a
positive science.
 Normative Science:
 According to J. M. Keynes, a normative science is a body of
systematized knowledge relating to the criteria of what ought to be.
 Normative economics involves value judgment. It is concerned
with the question of what ought to be. It makes distinction between
good and bad depending on ethics and beliefs of the people rather
than on scientific laws and principles. It prescribe what should be
done to promote human welfare.
 For instance, Should there be a new tax on Petroleum? Should
there be an increase in the minimum wage? Should the farmers be
subsidized? What ought to be the price of gas or electricity? etc.
these questions of what should be and what ought to be, falls
within normative economics.
 Economics is normative science as it explains about what should
be as far as the optimum use of resources and the value of society
is concerned.
 Finally we can say that
Economics is both a positive and normative science because
positive economics sets about to discover what is true about
the economy, while normative economics evaluates whether
the facts found are good or bad.
The Diverse Fields of Economics
TABLE The Fields of Economics
Behavioral economics uses psychological theories relating to emotions and social context to help
understand economic decision making and policy.
International economics studies trade flows among countries and international financial institutions.
Econometrics applies statistical techniques and data to economic problems in an effort to test
hypotheses and theories.
Economic development focuses on the problems of low-income countries. Important concerns include
population growth, provision for basic needs, and strategies for international
trade.
Economic history traces the development of the modern economy.
examines the role of government in the economy. What are the economic
Public economics functions of government, and what should they be?
Finance examines the ways in which households and firms actually pay for, or finance,
their purchases. It involves the study of capital markets
Health economics analyzes the health care system and its players: government, insurers, health
care providers, and patients.
The history of economic studies the development of economic ideas and theories over time, from Adam
thought, Smith to the works of economists such as Malthus, Marx, and Keynes.
Industrial looks carefully at the structure and performance of industries and firms within an
organization economy. How do businesses compete? Who gains and who loses?
Difference between Microeconomics and
Macroeconomics:
Difference between Microeconomics and Macroeconomics………Cont
Differences Between Positive and
Normative Economics
BASIS FOR COMPARISON POSITIVE ECONOMICS NORMATIVE ECONOMICS
Positive Economics, is a branch of The economics that uses value

Definition
economics that has an objective approach, judgements, opinions, beliefs is
based on facts. called normative economics.
Positive Economics refers to a science Normative economics is described

Meaning
which is based on data and facts. as a science based on opinions,
values and judgement.
Nature Positive economics is descriptive But normative economics is

prescriptive.
Positive economics explains cause and On the other hand, normative

What it does?
effect relationship between variables economics pass value judgements.
Differences Between Positive and Normative Economics……..cont.
BASIS FOR POSITIVE ECONOMICS NORMATIVE ECONOMICS

COMPARISON
Positive economics explains Whereas normative
Study of
‘what is’ economics explains ‘what
should be’.
The statements of positive The statements of normative

Testing
economics can be economics can not be
scientifically tested, proved scientifically tested,
or disproved. proved or disproved.
Positive economics clearly Unlike normative economics,
Economic issues
define economic issues. in which the remedies are
provided for the economic
issues, on the basis of value
judgement.
Production Possibility Curve:
A production–possibility frontier (PPF), production possibility
curve (PPC), or production possibility boundary (PPB) is a
curve which shows various combinations of the amounts of two
goods which can be produced within the given resources and
technology.
• A PPC is also called transformation curve because in

moving from one point to another on, it one good is
transformed into another not physically but by transforming
resources from one use to the another.
• A PPF explains several economic concepts, such as

allocative efficiency, opportunity cost, productive efficiency,
and scarcity of resources, full employment under
employment etc. In short a PCC represent graphically
alternative production possibilities facing an economy.
Production Possibility Curve……………………cont.
Combination of Food Technology

Possible Production
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 4.5 0
In the diagram the line is a PPC. It is (Technology)
found by connecting the production
possibility points A, B, C, D, E shown in
the schedule where the value of food are .G
presented in the horizontal axis and the PPC
value of Technology are presented in the
vertical axis. Point A shows that the
.H
country is using all of its resources for
the production of Technology, similarly
point B shows that the country is using
all its resources for the production of
food only. If the country wants to use its
resources for producing both goods it
would produce at point B, C, D, E. It
depends on the necessity whether the
country produces at point B or C or D or (Food)
E. Every point on the PPC shows
efficient use of the national resources.
Any point under PPC shows
(Technology)
inefficient use of resources by the
country. At point H the country
cannot use its resources .G
efficiently. But the nation cannot PPC
produce beyond the PPC because
of its limited resources. .H
Thus,
Efficient points = A, B, C, D, E, F
Inefficient point= H
Unattainable point= G
Attainable point= A,B,C,D,E,F,H
(Food)
Importance of PPC
• Determination of unemployment level and full employment level
A PPC can describe a country's unemployment and full employment
level. Any point on the PPC shows efficient use of resources. Thus a
country is at full employment level if it produces on the PPC but the
country is inefficient when it produces under the PPC. That is any point
under PPC is an unemployment situation for the country.
In the diagram at point C the PPC
country has unemployment
but the country is at full
employment at point A ,B.
• Determination of economic prosperity and depression
Economic prosperity and depression can be presented by the shift of PPC of
a country. Economic prosperity causes right shift of the PPC while
depression causes left shift of the PPC.
Economic prosperity
Depression
If AB is the primary PPC of a country. CD PPC shows the country's

economic prosperity and EF PPC shows the country's depression situation.
Because prosperity shows a county's increased ability of production and
depression shows a country's reduced ability of production.
• Determination of opportunity cost

We know opportunity cost is the loss of other alternatives when one alternative is
chosen. A PPC represents graphically alternative production possibilities facing
an economy with available resources.
The diagram shows a country's PPC AB.
Suppose the country was producing at ∆Y PPC
point E of the PPC. If the country decides
∆X
to produce more X good it should give
up using resources used in producing Y good. Let the country now produces at
point F of PPC with more X good compared to the previous point. It has given up
producing ∆Y amount of Y good in order to get extra ∆X amount of X good.
This is the opportunity cost of producing ∆X amount of X good. Thus a PPC can
be used to describe the concept of opportunity cost.
• Comparative analysis of different economy
PPC can be use to describe and compare among different economy.
(Capital good)
PPC of USA
PPC of Bangladesh
(Consumer goods)
The diagram shows two PPC's. PPC of USA is AB, PPC of Bangladesh is CD.
We can say that USA can produce more capital good than Bangladesh and
Bangladesh can produce more consumer goods then USA
Some Basic concepts:
Scarcity, Efficiency and Opportunity Cost
Scarcity:
Scarcity means limited supply. A situation of scarcity is one in
which goods are limited relative to desires.
Scarcity is the core problem behind the study of economics. Human
desires and wants are unlimited. But the resources to satisfy these
wants are limited. So there arises scarcity.
Due to scarcity, there arises the need for efficient use of limited
resources to satisfy maximum desires. Due to scarcity, people have
to make choice among their unlimited wants. This choice trade-off
means only some of the wants can be satisfied with the scarce
resource and other desires are to be forgone. Therefore, scarcity
forces people to behave rationally towards their unlimited wants.
Economics is all about managing scarcity.
Scarcity ………………cont
 Understanding scarcity with PPF
Good Y F: Unattainable desire point
P
A, B, C are the maximum
satisfiable desire points with
efficient use of resources
Good X
P
Fig- PPF
Points on PPF is the maximum attainable combination of

two good to satisfy the wants. Point- F is above the PPF.
So, it is unattainable desire due to the scarce resource.
 Efficiency:
 Efficiency refers to lack of waste. Efficiency denotes the most
effective use of a society’s resources in satisfying people’s wants
and needs.
 Economic efficiency requires that an economy produce the
highest combination of quantity and quality of goods and services
given its technology and scarce resources. An economy is
producing efficiently when no individual’s economic welfare can
be improved unless someone else is made worse off.
 Two aspects of Efficiency:
Productive efficiency
Allocative efficiency
Efficiency………………………….Cont.
 Productive efficiency
Productive efficiency means that, given the available inputs and
technology, it is impossible to produce more of one good without
decreasing the quantity that of another good. All choices on the
PPC display productive efficiency.
 Allocative efficiency
Allocative efficiency means the particular combination of goods
and services on the production possibility curve that represents
the combination which society most desires. At its most basic,
allocative efficiency means producers supply the quantity of each
product that consumers demand. Only one of the productively
efficient choices will be the allocatively efficient choice for
society as a whole.
Efficiency………………………….Cont.
 Understanding Efficiency with PPF:
Good Y
All the points on PPF are P

productive efficient point.
Among this points
allocative efficient point
will be one which is most
desired by the society.
P
Good x
Opportunity cost:
 Opportunity cost means forgone alternative. Opportunity cost is
the value of the best alternative forgone in making any choice.
Opportunity cost is the value of the best opportunity forgone in
a particular choice.
 People must make choices because of limited resources. Every
choice has an opportunity cost and so the satisfaction of one
want involves forsaking the other. Therefore the real cost of
satisfying any want is the alternative forgone or the opportunity
cost.
A, B, C are the different choices that can Good Y
at best be produced with efficient use of

Y1
resources. More of X (Y) can only be Y2
attained by forgoing Y (X). Y3 A
Point A to B, Good X increased from X1
to X2 at the cost of decrease of Y from Y1
to Y2. OC of X1 X2 is Y1 Y2. X1 X2 X3 Good X
Wants
In economics, the term want refers to a wish or desire to own goods and services that
give satisfaction. More generally, the concept involves the endless succession of
material wants exhibited by all human beings. Material wants are the desires of
consumers to obtain and use various goods and services that provide utility. Usually,
wants are backed by effective demand—ability and willingness to pay.
Characteristics of wants:
• Human wants are unlimited when one want is satisfied, new wants arises.
• Special wants are satisfiable although in aggregate sense wants are unlimited but
special wants can be satisfied
• Wants are complementary to each other. In most of the time many supporting
wants arises with specific want.
• Wants are competitive
• Wants are imitative. Many wants arise imitatively
• Wants are substitute to each other. For example, natural gas can be used for
cooking and for that purpose we can use electricity and wood as substitute of
natural gas.
Wants…..cont.
Considering the uses of the goods, wants can be classified

into three categories.
• Necessary Wants: It includes food clothes Shelters

education and treatment for health service
• Comfort wants : It includes tasty foods pleasant house,

stylish and comfortable clothes, air conditioned room etc.
• Luxurious wants: It includes diamond rings, expensive

dresses, furniture and ornaments, luxurious cars etc.
THANK YOU
MY DEAR STUDENTS
Microeconomics
Jannatul Ferdoushi
Commodity vs. Product:
• Although they are often confused and may be used interchangeably, the terms
commodity and product are very different.
Commodity:
• A commodity is a raw material used to manufacture finished goods. For example
include copper, crude oil, wheat, coffee beans, and gold (jewelry is product). Wood
is commodity and Furniture is product.
• There is little difference among commodities. They are taken from their natural
state and, if necessary, brought up to meet minimum marketplace standards.
• No value is added to the commodity, and all commodities of the same good sell at
the same price regardless of the producer.
Product:
• A product is the finished good sold to consumers. Products are made using
commodities and are then put on the market and sold to consumers.
• Products are also referred to as consumer goods or final goods purchased for
consumption by the average consumer.
• A product can be differentiated, and value can be added by the manufacturer
and through branding and marketing.
• Products are typically classified as either durable or consumable goods.
Durable consumer goods, such as appliances, furnishings, and jewelry,
that are generally long-lasting and purchased infrequently.
Consumable goods include gas, groceries, and tobacco products that
are used quickly or need frequent replacement.
Three basic economic problems
described by P A Samuelson
Twin themes of economics are scarcity and efficiency. Scarcity of
resource create the problem of choice. Thus efficient use of limited
resources is needed to meet unlimited wants.
Paul Samuelson has generalized people's economic problems into
three basic problems. They are-
 What to produce?
 How to produce?
 For whom to produce ?
Here is the explanation to these fundamental economic problems
Three basic economic problems described by P A Samuelson….cont.
• What to produce?
The very first fundamental problem that every society faces
is to decide about which goods should be produced and in
which amount. This question is to find the solution to the
best use of alternative resources to meet the demand. It is not
possible to fulfill all the wants of a society with limited
resources. That is why a society should decide first that
which goods it should produce and in which amount. The
resources would be used by the way in decides to produce
goods.
A production possibility curve can be used to describe this problem.
The above diagram shows a production possibility curve of a nation which considering
use of resources to produce food and technology. If the nation uses all of its resources to
produce only food it can be denoted by point A of the diagram.
Similarly D point shows that if the nation appoints Technology
all of its resources to produce technology, the
nation's choice would be at point D. D
But if the nation wants to produce both food and C
technology, it would choice C and B points. E
At point B, it would distribute more resources to

produce food and less resources to produce B
technology. At point C the nation would produce more
technology with less food and distribute its resources,
by this way.
A
Producing at point B or C depends on the necessity. Food
Thus a nation decides about what to produce as their
first basic economic problems using the PPC concept.
• How to produce?
Efficient use of limited resources is a must for a nation. That is the
reason that a nation has to face the second fundamental economic
problems of deciding the production method. Once the decision
about what to produce is taken, then the nation should adopt the
best production strategy for efficient use of resources. Efficient
production strategy depends on the available factors of production
of a nation. If a nation is labor abundant, it should take labor
intensive production method or produce those goods which requires
more labor than capital. On the other hand, If a nation is capital
abundant, it should use capital intensive method of production or it
should produce those goods that require more capital than labor.
An iso- product curve can be used to describe the second

fundamental economic problem.
The above diagram representing the iso -product curve where the
same output can be produced from different combination of labor and
capital. A point shows capital intensive method because capital is
being used more than labor. Similarly B point shows the labor-
Capital
intensive method.
A nation would decide whether to
produce at point A or at point B depends A
on the availability of resources in that

nation. Thus the choice of production B
method is another fundamental economic
problems for a nation.
Labor
• For whom to produce?

This question is about the distribution. Once a nation produce
goods and services ,it must ensure proper distribution.
Without proper distribution, the whole economic system would turn
into failure. Economic welfare maximization needs proper
distribution of goods and services.
A government should care about its different income class people to
provide their basic and necessary goods and services.
Economic System
Economic systems are the means by which countries and

governments organizes and distribute the scarce resources
to answer the questions of what, how, and for whom?. They
are used to control the four factors of production, including
land, labor, capital, and entrepreneurs.
Different economic systems view the use of these factors in
different ways.
Economic System…………………..cont.
• Types of Economic System:
Basic economic problems are same in different society
and different countries in the world. On the basis of
these economic problems and live style of different
peoples in different countries, economic system can be
divided into four types primarily-
1. Capitalistic Economy
2. Command Economy
3. Mixed Economy
4. Islamic Economy
Capitalistic Economy
Capitalistic economy was first emerged in Europe through
French revolution in 1789. Capitalist economic system is a
system of economics based on the private ownership of
capital and production inputs, and on the production of
goods and services for profit. The production of goods and
services is based on supply and demand in the general
market (market economy) rather than through central
planning (planned economy).
According to J. F. Ragan & L. B. Thomas,

"Pure capitalism is characterized by private ownership of
resources and by reliance on market, in which buyers and
sellers come together and determine what quantities of
goods and resources are sold and at what price."
Characteristics of Capitalistic Economy
The main features of capitalistic economy are following
• Private Property Right:
The most important characteristics of capitalism is the existence of
private property right. Every individual has a right to hold property
and right to acquire private property. Individual has a right to
transfer his property to his successors after death.
• Price Mechanism:
It plays important role in the production of goods and services. In a
capitalist economic system, the price is determined by the demand
and supply conditions.
Characteristics of Capitalistic Economy……………cont.
• Profit motive:
The profit motive is the life blood of capitalist system.
This is the motive that induces the entrepreneur to start
any business.
• Freedom of Choice:
The question 'what to produce?" will be determined by
the producers. They have the freedom to decide. The
factors of production can also be employed anywhere
freely to get due prices for their services. Similarly,
consumers have the freedom to buy anything they
want.
• Market Forces:
Market forces like demand, supply and price are the signals
to direct the system. Most of the economic activities are
centered on price mechanism. Production, consumption and
distribution questions are expected to be solved by market
forces.
• Minimum role of Government:
As most of the basic economic problems are expected to be
solved by market forces, the government has minimum role
in the economy. Their role will be limited to some important
functions including regulation of market, defense, foreign
policy, exchange rate system etc.
• Monopoly and Exploitation:

The establishment of large-scale business, improvement in
technology, motive of maximization of profits and acute
competition are the reasons for creation of monopoly and
exploitation of customers.
• Class Conflicts:
The capitalist economy divides the community into two
parts; on the first side the top capitalists and on the other
side labor class which depends on the capitalists to fill their
stomach. Since the production resources are controlled by
the capitalists, they exploit the labor for their reasonable
reward.
Command/Socialistic Economy
• Socialism is social and economic doctrine that calls for public
rather than private ownership or control of property and natural
resources. According to the socialist view, everything that people
produce is in some sense a social product, and everyone who
contributes to the production of a good is entitled to a share in it.
Society as a whole, therefore, should own or at least control
property for the benefit of all its members.
• According to J. F. Ragan & L. B. Thomas,
"Socialistic economy: An economic system in which property is
publicly owned and central authorities co-ordinate economic
decisions"
Characteristics of Command/
Socialistic Economy
The features of command economy are following-
• Collective Ownership:
In socialism, all means of production are owned by the community
i.e. Government, and no individual can hold private property beyond
certain limit. Government utilizes these resources in the interest of
social welfare.
• Central economic Planning:
Under socialism, government fixes certain objectives. ln order to
achieve these objectives, government adopts economic planning. All
types of decisions are taken by the Central Planning Authority.
Characteristics of Command/Socialistic Economy………cont.
• Major Role of Government:

In socialism, government plays significant role in decision making.
Thus, government has complete control over economic activities like
distribution, exchange, consumption, investment and foreign trade etc.
• Work and Wages According to Ability and Needs:
In socialistic economy, work is according to ability and wage is
according to need. It is said that under socialism "from each according
to his ability to each according to his needs, is socialism.”
• Economic, Social and Political Equality:
Under socialism, there is almost equality between rich and poor. There
is no problem of class struggle.
• Maximum Social Welfare:

The sole objective of socialism is the maximum social welfare of
the society. It means that there is no scope of exploitation of labor
class. Government keeps a close eye on the needs of the poor
masses while formulating plans.
• Freedom of Consumption:
Under socialism, consumers' freedom implies that production in
state- owned industries is generally governed by the preferences of
consumers, and the available commodities are distributed to the
consumers at fixed prices through the state-run department stores.
Consumers freedom under socialism is confined to the choice of
socially useful commodities.
• Little importance of price mechanism:

In a socialist economy the price mechanism is given a minor
role in resource allocation. A specific plan based on social
needs provides guidelines for resources allocation.
• Social welfare motive:
In a socialist economy research are used in production
process to maximize social welfare instead of private profits.
Social welfare is the basis of all economic decisions and
economic policies. Price policy is guided by social welfare
motive. Everyone is entitled to the benefits of socialized
production on the basis of equal rights.
Difference between Capitalistic
and Command Economy
Subjects Capitalistic economy Command economy
Definition A theory or system of A theory or system of
social organization based social organization based
around a free market and on the holding of
privatization in which most property in common
ownership is ascribed to with actual ownership
the individual persons. ascribed to the workers.
Voluntary co-ownership
is also permitted.
Price control Prices are determined by In a state managed
market forces. Firms with economy prices are
monopoly power may be usually set by the
able to exploit their government this can lead
position and charge much to shortages and surpluses
higher prices.
Difference between Capitalistic and Command Economy……cont.

Distribution Capitalism is unconcerned Socialism is concerned
about Equity. It is argued with redistributing
that inequality is essential resources from the rich to
to encourage innovation the poor. This is to ensure
and economic everyone has both equal
development. opportunities and equal
outcomes.
Exploitation Class exploitation is Class exploitation is
present here. absent here.
Labor Labor division is high in Labor division is not
division here. possible in here.
Inflation Inflation is present in here. Inflation is not present in
here.
Difference between Capitalistic and Command Economy……cont.

Ownership Private businesses will be The State will own and
of factors owned by private control the main means of
individual. production. In some models
of socialism ownership
would not be by the
government but worker
cooperatives.
Profit Goods and services are Here, personal profit is not
produced to make a profit, accepted.
and this profit is reinvested
into the economy to fuel
economic growth.
Discrimination Government does not The people are
discriminate based on race, considered equal; laws
color, or other arbitrary are made when
classification. Under state necessary to protect
capitalism (unlike free-market people from
capitalism), government may discrimination.
have policies that,
intentionally or not, favor the
capitalist class over workers.
Unemployment In capitalist economic Employment is often
systems, the state doesn't directed by the state.
directly provide jobs. Therefore, the state can
Therefore, in times of provide full
recession, unemployment can employment even if
rise to very high levels. workers are not doing
anything particularly
essential.
Mixed Economy
• Mixed economy is an economic system that features
characteristics of both capitalism and socialism. A mixed
economic system allows a level of private economic freedom
in the use of capital, but also allows for governments to
interfere in economic activities in order to achieve social
aims. This type of economic system is less efficient than
capitalism, but more efficient than socialism.
• According to J. F. Ragan & L. B. Thomas,

"Mixed economy is an economic system that mixes pure
capitalism and a command economy. Some resources are
owned privately, others publicly. Some economic decisions
are made in markets, others by central authorities.
Characteristics of Mixed Economy
• Co-existence of Private and Public Sector:
Under this system there is co-existence of public and private
sectors. In public sector, industries like defense, power, energy,
basic industries etc. are set up. On the other hand, in private sector
all the consumer goods industries, agriculture, small-scale
industries are developed. The government encourages both the
sectors to develop simultaneously.
• Private Property is allowed:
In mixed economy, private property is allowed. However, here it

must be remembered that there must be equal distribution of wealth
and income. It must be ensured that the profit and property may not
concentrate in a few pockets.
Characteristics of Mixed Economy……...cont.
• Price Mechanism and Controlled Price:

Under this system, price mechanism and regulated price
operate simultaneously. In consumer goods industries, price
mechanism is generally followed. However, at the time of
big shortages or during national emergencies prices are
controlled and public distribution system has to be made
effective.
• Profit Motive and Social Welfare:
In mixed economy system, there are both profit motive like
capitalism and social welfare as in socialist economy.
• Check on Economic Inequalities:
In this system, government takes several measures to reduce the
gap between rich and poor through progressive taxation on income
and wealth. The subsidies are given to the poor people and also job
opportunities are provided to them. Other steps like concessions,
old age pension, free medical facilities and free education are also
taken to improve the standard of poor people. Hence, all these helps
to reduce economic inequalities.
• Control of Monopoly Power:
Under this system, government takes huge initiatives to control
monopoly practices among the private entrepreneurs through
effective legislative measures. Besides, government can also take
over these services in the public interest.
• Social Welfare:
The principal aim of a mixed economy is to maximize social
welfare. To remove inequalities of income and wealth, and
unemployment and poverty, such socially useful measures as
social security, public works, etc. are adopted to help the poor.
Fiscal and direct control measures are taken to control
monopoly.
• Individual freedom:
The people have freedom of consumption and to choose their

occupations in this economic system. Private entrepreneurs are
to choose technique of production.
Islamic Economy
Islamic economics is a social science which studies
economic problems of the people in the light of Islam.
• To give a more professional definition: referring

Umar Chapra:
" That branch of knowledge which helps to realize

human well-being through an allocation and
distribution of scarce resources that is in conformity
with Islamic teachings without unduly curbing
individual freedom or creating continued
macroeconomic and ecological imbalances."
Characteristics of Islamic Economy
• Alliance with Shariah:
Islamic economics system lies on the principles specified by the
shariah i.e. the Holy Quran and traditions of Prophet Muhammad,
Izmaa and Qius.
• Based on equality:
The role of state in Islamic economics is to ensure;
first, every individual has equal access to natural resources and
means of livelihood.
Second, everyone has equal opportunity to use the resources
including education, skills and technology.
Third, the market is based on the rule of justices, i.e. authority
ensures a fair price.
Characteristics of Islamic Economy……..cont.
• Property Rights:
The property rights are based on the principle that Allah is
the owner of the entire resources, individual has been given
the rights of the possession as a trust.
• Possession of Wealth:
Wealth can be acquired legitimately through work and
inheritance. It should not be used for lavish or luxury
consumption and the use for social purpose is encouraged
(and rewarded in the hereafter).
• System of Zakat:
The poor and needy have a claim over the wealth of rich
people. The clams is institutionalized in the system of zakat,
a compulsory levy of 2.5% on assets and 5% or 10% on
agricultural produce for a list of purposes outlined by the
Holy Quaran.
• Consumption of Wealth:
ln Islamic system, uses of luxuries are not allowed because
it’s against the concept of "TAQWA“. There should have
difference between "HALAL" and "HARAM".
• Distribution of Wealth:
Islamic Economics System favors fair (not equal) distribution of wealth
in the sense that it should not be confined to any particular section of
the society. For fair distribution of wealth Islam gives following steps-
 Interest free Economy:
The whole financial system the bank structure in particular is run on the
basis of "SHARAKAT" and "MUZARABAT" in Islamic state.
Therefore, Islamic economics is an interest free economy.
 Responsibility of the Government:
Responsibility of the Islamic Government are should check un-Islamic
activity like gambling, smuggling, black marketing etc. and should
secure poor people by giving them necessity of life i.e. food, clothing,
health etc. Social and Economic security are guaranteed by the Govt.
 Concern for Poor:

The Almighty Allah has expressed His desire to show favor on the
depressed people. Islamic economy shall establish all possible
institutions to carry out this desire of the Almighty.
Importance of Microeconomics
• Helpful in business decision making
Microeconomics plays an important role in the business
decision-making process. It guides the business managers in
optimal resource utilization, demand analysis, cost analysis,
optimal production decision, and pricing policy.
• Helpful to understand the working of the economy
Microeconomics is helpful to understand the working of the
economy. It tells us how millions of consumers and
producers in an economy take decisions about the allocation
of productive resources among millions of goods and
services.
Importance of Microeconomics……….cont.
• Helpful to formulate economic policies
Microeconomic tools are useful in designing price policy,
taxation policy and others in an economy dominated by the
public sector. It is also useful in designing the prices of
public utilities in an economy.
• Helpful in formulating sectoral policies
There are different sectors such as industry, tourism, trade,
and others. An understanding of each of these sectors is
imperative before an appropriate policy is designed for them.
Microeconomics provides a useful tool for the government
while making sectoral decisions.
Importance of Microeconomics……….cont.
• Helpful in an efficient allocation of resources
Microeconomics efficiently allocates the resources. The
microeconomic theory explains the condition of efficiency in
both consumption and production that ensures maximum
social welfare.
• Helpful in the Study of human behavior
Microeconomics studies human behavior related to
consumption with the help of the law of diminishing
marginal utility, equi-marginal utility, indifference curve and
revealed preference theory.
Limitation of Microeconomics
• Static
Mostly static analysis is used in the study of
microeconomics. In microeconomics, many
economic variables are assumed to be constant
which makes it unrealistic.
• Unrealistic assumptions
The microeconomic analysis is based on many
unrealistic assumptions like the existence of
“perfect competition”, “laissez faire” in the
economy which is not found in real life.
Limitation of Microeconomics…………..cont.
• Limited scope
Microeconomics has limited scope as it cannot study
many important economic policies and problems like
fiscal policy, monetary policy, inflation,
unemployment, etc. which are very important in the
economy.
• Ignores the role of the government
As microeconomics market forces are assumed to play
their role freely but there are certain rules and
regulations of the government that are to be followed
in the daily economic activities.
Limitation of Microeconomics…………..cont.
• Wrong conclusions
According to the viewpoint of macroeconomics,
the conclusions drawn from the study of
microeconomics in many cases are not valid.
THANK YOU
Microeconomics
Jannatul Ferdoushi
CHAPTER-2
&
Demand
• In economics, demand is the quantity of a good
that consumers are willing and able to purchase
at various prices during a given period of time.
• Demand is backed by —
I) Desire for a good
II) ability and
III)willingness to pay.
Demand Function
 The demand function is the mathematical expression of the relationship
between the quantity of a good demanded and those factors that affect
the willingness and ability of a consumer to buy the good.
Qd = f(P, Pc, Ps, Y, H, T, CN, E) is a demand function

where Qd → Quantity of a good demanded,
P → Price of the own good,
Pc → Price of a complementary good,
Ps → Price of a substitute good,
Y → Income
T → Choice & Taste of consumers
CN → Number of consumers
E → Surrounding environment
 Holding all other factors constant, a demand function generally
expressed as, Qd = f(P)
Determinants of Demand
• Good’s Own Price:
The most important factor that influences the demand of a commodity
is its own price. And the relationship between demand and own price is
inverse.
• Tastes:
Favorable changes increase demand, unfavorable changes decrease
demand.
• Population:
More buyers increase demand, fewer buyers decrease demand.
• Disposable Income:
More disposable income (income after tax) increases demand, less
disposable income decreases demand for normal goods. (An inferior
good is when demand varies inversely with income).
Determinants of Demand…….cont.
• Prices of related goods:
 Substitute goods (can be used in place of each other). This implies that
the price of the substitute and demand for the other good are directly
related, e.g., if the price of Coors beer rises then the demand for
Budweiser will also rise.
 Complementary goods (can be used together, such as tennis balls and

rackets, or college tuition and books). When goods are complements,
there is an inverse relationship between price of one good and the
demand for the other (e.g., if tuition rises, then students take fewer
courses such that book demand will be lower).
• Expectations:
Consumers’ views about the future prices, product availability, and income
can shift the demand curve
Demand Schedule:
• Demand schedule refers to the table that represents the
relationship between the price and the quantity demanded.
• The schedule shows the amount of consumer demand at the
corresponding market price. This is a tabular expression of the
law of demand, which states that people will buy less of
something if the price goes up and vice versa.
According to the demand schedule
at price 1/-, the quantity of demand
Price Quantity is 12 units. When price increased to
Demanded 2/- and 3/- quantity demanded falls
1 12 to 8 and 4 units respectively. Thus
demand schedule shows inverse
2 8
relationship between the price and
3 4 the quantity demanded for the
goods.
Demand Curve
In economics the demand curve is the graphical representation of
the relationship between the price and the quantity that consumers
are willing to purchase.
• The curve shows how the quantity demanded changes as price
of a commodity or service changes. Every point on the curve is
an amount of consumer demand and the corresponding market
price.
• The graph is the graphical expression of the law of demand,
which states that people will buy less of something if the price
goes up and vice versa.
Demand Curve…………..cont.
In the given figure, price and quantity demanded are measured
along the Y-axis and the X-axis respectively.
Price
D
Point A shows when the price is
1/-, the quantity demanded is 12 C
3
units. As price increased to 2/- and
3/- quantity demanded falls to 8 B
2
and 4 units respectively(indicated
by point B & C). By joining point
1 A
A, B and C we get demand curve
DD1. Thus demand curve shows D1
inverse relationship between the
o 4 8 12
price and the quantity demanded Quantity demanded
for the goods. So demand curve is
downward sloping.
Law of Demand
• In microeconomics, the law of demand states that, "other factors
being constant (cetris peribus), as the price of a good increases
(↑), quantity demanded decreases (↓); conversely, as the price of
a good decreases (↓), quantity demanded increases (↑)".
• In other words, the law of demand describes an inverse
relationship between price and quantity demanded of a good.
• "Law of Demand states that people will buy more at lower prices
and buy less at higher prices, if other things remaining the same."-
Prof. Samuelson.
• The Law of Demand states that amount demanded increases with
a fall in price and diminishes when price increases." - Prof. Marshall
• "According to the law of demand, the quantity demanded varies
inversely with price." –Ferguson
Law of Demand………..Cont.
Assumptions:
This law operates when the commodity’s price changes and all
other prices and conditions do not change. The main
assumptions are
 Habits, tastes and fashions remain constant

 Money income of the consumer does not change.
 Prices of other goods remain constant
 The commodity in question has no substitute
 The commodity is a normal good and has no
prestige or status value.
 People do not expect changes in the future prices.
Table represents the increase in the price lead to decrease the
quantity of demand.
Price Quantity Demanded

1 12
2 8
3 4
If the price is 1/-, the quantity of demand is 12 units. As price

increased to 2/- and 3/- quantity demanded falls to 8 and 4
units respectively. This table shows inverse relationship
between the price and the quantity demanded for the goods.
Price
D
1/-, the quantity demanded is 12
units. As price increased to 2/- and 3 C
3/- quantity demanded falls to 8
and 4 units respectively(indicated 2 B
by point B & C). By joining point
A, B and C we get demand curve 1 A
DD1. Thus demand curve shows
D1
inverse relationship between the
price and the quantity demanded o 4 8 12
Quantity demanded
for the goods. So demand curve is
downward sloping.
Limitation:
Though as a rule when the prices of normal goods rise, then the demand
decreases but there may be a few cases where the law may not operate. The
circumstances when the law of demand becomes ineffective are known as
exceptions of the law. Some of these important exceptions are :
• Price expectation:
If people expect a further rise in the price of particular commodity, they may
buy more in spite of rise in price. The violation of the law in this case is only
temporary.
• Fear of shortage:
When people feel that a commodity is going to be scarce in the near future,
they buy more of it even if there is a current rise in price. For example: If the
people feel that there will be shortage of L.P.G. gas in the near future, they
will buy more of it, even if the price is high.
• Change in income :The demand for goods and services is also affected
by change in income of the consumers . If the consumers’ income
increases, they will demand more goods or services even at a higher price.
On the other hand, they will demand less quantity of goods or services
even at lower price if there is decrease in their income. It is against the law
of demand.
• Change in fashion: The law of demand is not applicable when the
goods are considered to be out of fashion. If the commodity goes out of
fashion, people do not buy more even if the price falls. For example:
People do not purchase old fashioned shirts and pants nowadays even
though they’ve become cheap. Similarly, people buy fashionable goods in
spite of price rise.
• Basic necessities of life: In case of basic necessities of life such as salt,
rice, medicine, etc. the law of demand is not applicable as the demand for
such necessary goods does not change with the rise or fall in price.
• Prestigious goods:
There are certain commodities like diamond, sports cars etc., which are
purchased as a mark of distinction in society. If the prices of these
goods are rises, the demand for them may increase instead of falling.
• Ignorance of the consumer:
If the consumer is ignorant about the rise in price of goods, he may buy
more at a higher price.
• Giffen goods:
If the price of basic goods (potatoes, sugar, etc. on which the poor
spend a large part of their incomes) falls then the demand for those
goods also falls, because by the surplus income through falling price
people buy superior goods.
Draw a Demand Curve from a Hypothetical
Demand Function
• Let a hypothetical demand function is Qd = 16 - 4P
• By putting different values of price different quantity
demanded can be obtained.
If P = 1 then, Qd = 16 - 4(1)= 16 – 4 =12

If P = 2 then, Qd = 16 - 4(2)= 16 – 8 = 8
If P = 3 then, Qd = 16 - 4(3)= 16 – 12 = 4
Price Quantity Demanded
1 12
2 8
3 4
Draw a Demand Curve from a Hypothetical Demand Function…….....…cont.

Price
D
1/-, the quantity demanded is 12
units. When price increased to 2/- 3 C
and 3/- quantity demanded falls to
8 and 4 units 2 B
respectively(indicated by point B
& C). By joining point A, B and C 1 A
we get demand curve DD1. Thus
D1
demand curve shows inverse
relationship between the price and o 4 8 12
Quantity demanded
the quantity demanded for the
goods. So demand curve is
downward sloping.
Why Demand Curve is Downward Sloping?
• There may be various reasons for the falling nature or downward
sloping of demand curve. Some of them are as follows:
 Law of diminishing marginal utility
 Substitution effect
 Income effect
 New buyers
 Old buyers
• Law of diminishing marginal utility

The law of diminishing marginal utility states that with each increasing
quantity of the commodity, its marginal utility declines.
Thus, when the quantity of goods is more, the marginal utility of the
commodity is less. Thus, the consumer is not willing to pay more price
for the commodity. It means, when consumers demand more of a
product they pay less for each marginal unit. A greater amount of
demand can only be matched with lower price.
Why Demand Curve is Downward Sloping?................cont.
• Substitution effect
Consumers often classify various commodities as substitutes. For
example, Tea and coffee are substitute goods. If the price of tea rises,
consumers will shift to coffee as it will become relatively cheaper –
known as Substitution effect. This will decrease the demand for tea and
increase the demand for coffee. Thus, the demand curve of tea will
slope downwards.
• Income effect
Income effect refers to the change in the real income or the purchasing
power of the consumers due to change in the price of the products.
When the price falls the purchasing power of the consumer’s increases
and they buy more goods. Similarly, when the price rises, the
purchasing power of the consumer’s decreases and they buy less
quantity of goods.
Why Demand Curve is Downward Sloping?................cont.
• New buyers
Whenever the price of a commodity decreases, new buyers enter
the market and start purchasing it. This is because they were
unable to purchase it when the prices were high but now they
can afford it. Thus, as the price falls, the demand rises and the
demand curve becomes downward sloping.
• Old buyers
This rule is basically a corollary of the new buyers rule. When
the price of a commodity decreases, the old buyers can afford to
buy even more quantities of it. As a result, these results in
demand increasing and the demand curve slopes downwards.
 Give a graphical explanation
Movement along Demand Curve/
Contraction and Extension of Demand
• When the demand of a commodity changes due to
change in the own price of the commodity, with
other factors remaining constant, these changes are
known as movement along the demand curve.
• A change in price causes a movement along the
demand curve. It can either be-
 Contraction (less demand) of demand
or
 Expansion/extension (more demand) of demand
Contraction and Extension of Demand………….cont.
• Expansion of Demand
If the prices decrease, other factors kept constant, there is an
increase in the quantity demanded which is referred to as an
expansion of demand. Graphically, this is represented as an
downward movement along the same demand curve.
• Contraction of Demand
If the prices increase, keeping other factors constant, there is
a decrease in the quantity demanded which is referred to as a
contraction of demand. Graphically, this is represented as a
upward movement along the same demand curve.
Contraction and Extension of Demand………….cont.
In Fig. initial demand for the commodity is OQ1 at a price of OP1.
Expansion of demand:
A fall in price from P1 C
P3
to P2 leads to an
P1 A
expansion (increase) in
demand from Q 1 to Q 2. P2 B
Contraction of demand:
O
An increase in price Q3 Q1 Q2 Quantity demanded
from P1 to P3 leads to a
contraction(decrease) in
demand from Q1 to Q3.
Shift in Demand Curve/
Increase and Decrease in Demand
• When the demand of a commodity changes due to change in any factor
other than the own price of the commodity, these changes are known as
change in demand or shift in demand.
• Various Reasons for Shift in Demand Curve:
(i) Change in price of substitute goods and complementary goods;
(ii) Change in income of consumers;
(iii) Change in tastes and preferences;
(iv) Expectation of change in price in future;
(v) Change in population;
(vi) Change in distribution of income;
(vii) Change in season and weather.
Shift in Demand Curve/Increase and Decrease in Demand
………cont.
Any change in other factor, holding price constant, causes a shift
in the demand curve. It can either be-
 Increase in demand
 Decrease in demand
• Increase in Demand:
Increase in Demand refers to a rise in the demand of a
commodity due to any factor other than the own price of the
commodity. In this case, demand rises at the same price. It
leads to a rightward shift in the demand curve.
• Decrease in Demand:
Decrease in Demand refers to a fall in the demand of a
commodity. In this case, demand falls at the same price. It
leads to a leftward shift in the demand curve.
Shift in Demand Curve/
Increase and Decrease in Demand……cont.
• Let us understand the concept of shift in demand curve with the help of
diagram.
• In Fig. initial demand for the commodity is OQ1 at a price of OP1. Change
in other factors leads to a rightward or leftward shift(increase and decrease)
in the demand curve:
i. Increase in Demand is shown by Price
rightward shift in demand curve

from D1 to D2. Demand rises from
OQ1 to OQ2 due to favourable
change in other factors at the same
price OP1.
ii. Decrease in Demand is shown by

leftward shift in demand curve from
D1 to D3. Demand falls from OQ1 to
OQ3 due to unfavourable change in Quantity demanded
other factors at the same price OP1.

Difference between movement along the demand
curve and shift in the demand curve
 A change in price, holding other factors constant, causes a
movement along the demand curve. It can either be-
 Contraction (less demand) of demand
 Expansion/extension (more demand) of demand
in the demand curve. It can either be-
 Increase in demand
 Decrease in demand
 A change in price doesn’t shift the demand curve – move from

one point of the demand curve to another.
A shift in the demand curve occurs when the whole demand
curve moves to the right or left.
Difference between movement along the demand curve and
shift in the demand curve………cont
 Shift in the demand occurs due to change in any factor other

than price-(i)Change in price of substitute goods; (ii) Change in
price of complementary goods; (iii) Change in income of
consumers; (iv) Change in tastes and preferences; (v)
Expectation of change in price in future; (vi) Change in
population; (vii) Change in distribution of income; (viii)
Change in season and weather.
A movement along the demand curve occurs due to change in
price, other factor remaining constant.
 Graphical difference
Supply
Supply refers to the amount of a good or service
that the producers/providers are willing and able to
offer to the market at various prices during a
period of time.
 Supply refers to what is offered for sale and not

to stock or inventory.
Supply function
• The supply function is the mathematical expression of the relationship between
the quantity of a good or service supplied and those factors that affect the supply of
good.
• The supply function may now be expressed as:
Sx = f (Px, Pa… Pc, PL… PO, T, Ns, St, O, G)

Px → own price of good x,
Ps … Pc → prices of related (substitute and
complementary) goods,
PL … PO→ prices of inputs,
T → time,
Ns → number of sellers
St → the state of technology,
O → objectives of the firm, and
G → taxes, subsidies and regulation.
 Example of a supply function: S= 10+ 2P
Determinants of Supply
• Own Price:
The most important factor that influences the supply of a
commodity is its own price. And the relationship between supply
and own price is a direct one.
• Production cost:
Since most private companies’ goal is profit maximization. Higher
production cost will lower profit, thus hinder supply. Factors
affecting production cost are: input prices, wage rate, rents and
interest on capital, transportation charges, etc.
• Technology:
Technological improvements help reduce production cost and
increase profit, thus stimulate higher supply.
Determinants of Supply………………..cont.
• Number of sellers:
More sellers in the market increase the market supply.
• Expectation for future prices:
If producers expect future price to be higher, they will try to hold
on to their inventories and offer the products to the buyers in the
future, thus they can capture the higher price.
• Prices of other related goods:

If the price of a substitute goods rises, producers can shift
production towards the higher priced good causing a decrease in
supply of the original good. If a raw material has a by-product, an
increase in supply of one good implies a corresponding increase in
supply of the by-product.
• Government Policy (Taxes & Subsidies) :
a business tax is treated as a cost so decreases supply; a
subsidy lowers cost of production so increases supply.
Similarly, subsidies may be given to firms so that they can
produce goods needed by the society.
• Prices of Joint Products:

When two or more goods are produced in a joint process and
the price of any of the product increases, the supply of all the
joint products will be increased and vice versa. For example,
increase in price of meat will increase the supply of leather.
• Time:
In the short run, usually the supply of a commodity (mainly
perishable good) is unresponsive to price change. But, in the
long run, the supply of a commodity tends to be more
flexible or fluctuating in response to the changing situation.
For instance, the supply of non-perishable goods responds
more than the perishable goods when their prices change.
• Factors outside the economic sphere:
Supply depends upon the below said factors. If these factors
(Whether conditions, Floods, Wars, Epidemics or unexpected
situations) arise; they affect the supply directly or indirectly.
Supply Schedule
In economics the supply schedule is a tabular
presentation of positive relationship between price
and quantity supplied by the seller or producer
during a period of time.
• The supply curve is a graphical representation
of the law of supply. It shows various
combinations of price and quantity supplied by the
seller or producer during a period of time.
• We can show the supply schedule through the
following imaginary table.
Supply schedule………….cont.
Price Quantity Supplied

1 10
2 20
3 30
• The given schedule shows positive relationship between price

and quantity supplied of a commodity. When the price is 1 Tk ,
quantity supplied by the seller is 10 unit. As the price increases
from 1Tk to 2Tk and 3Tk then, the quantity supplied by the seller
also increases from 10 to 20 and 30 respectively.
Thus, the above schedule shows that there is positive relationship in
between price and quantity supplied of a commodity.
Supply curve
In economics the supply curve is the graphical
presentation of positive relationship between
price and quantity supplied by the seller or
producer during a period of time.
• The supply curve is a graphical
representation of the law of supply. By
plotting various combinations of price and
quantity supplied, we can derive an upward
sloping demand curve.
Supply curve…………cont.
In the given figure, price and quantity supplied are measured along
the Y-axis and the X-axis respectively.
Point A shows when the price is 1 Tk,

quantity supplied by the seller is 10 unit. Price
As the price increases from 1Tk to 2Tk S1

C
and 3Tk then, the quantity supplied also 3
increases from 10 to 20 and 30 B

2
respectively.(indicated by point B & C). A
1
By joining point A, B and C we find an S
upward sloping supply curve SS1. The 0 10 20 30
positive slope of the supply curve SS1 Quantity Supplied
establishes the law of supply and shows

the positive relationship in between price
and quantity supplied.
Law of Supply
• The law of supply states that, other things remaining the same,
the quantity supplied of a commodity is directly or positively
related to its price.
• In other words, when there is a rise in the price of a commodity
the quantity supplied of it in the market increases and when
there is a fall in the price of a commodity, its quantity supplied
decreases, other things remaining the same.
 "The law of supply states that other things being equal the
higher the price, the greater the quantity supplied or the lower
the price, the smaller the quantity supplied. " — Dooley
 "The law of supply states that other things being equal, the
quantity of any commodity that firms will produce and offer for
sale is positively related to the commodity's own price, rising
when price rises and falling when price falls." — Lipsey
Law of Supply………….cont.
• Assumptions:
The term “other things remaining the same” refers to the following
assumptions in the law of supply:
 No change in the state of technology.

 No change in the price of factors of production.
 No change in the number of firms in the market.
 No change in the goals of the firm.
 No change in the seller’s expectations regarding future prices.
 No change in the tax and subsidy policy of the products.
 No change in the price of other goods.
• The law of supply can be explained with the help of supply
schedule and supply curve as explained below.
Price Quantity Supplied

1 10
2 20
3 30
• The given schedule shows positive relationship between price and
quantity supplied of a commodity. When the price is 1 Tk , quantity
supplied by the seller is 10 unit. As the price increases from 1Tk to 2Tk
and 3Tk then, the quantity supplied by the seller also increases from 10
to 20 and 30 respectively.
Thus, the above schedule shows that there is positive relationship in
between price and quantity supplied of a commodity.
In the given figure, price and quantity supplied are measured along
the Y-axis and the X-axis respectively.
Point A shows when the price is 1 Tk,

quantity supplied by the seller is 10 unit. Price
As the price increases from 1Tk to 2Tk S1

C
and 3Tk then, the quantity supplied also 3
increases from 10 to 20 and 30 B

2
respectively.(indicated by point B & C). A
1
By joining point A, B and C we find an S
upward sloping supply curve SS1. The 0 10 20 30
positive slope of the supply curve SS1 Quantity Supplied
establishes the law of supply and shows

the positive relationship in between price
and quantity supplied.
 Limitations
 Price expectation of seller: If the seller expects that the price of
commodity is going to fall in near future, he will try to sell more
even if the price level is very low. On the other hand, if the seller
expects further rise in price of the commodity he will not sell more
even if the price level is high. It is against the law of supply.
 Stock clearance sale: When a seller wants to clear its old stock in
order to store new goods, he may sell large quantity of goods at
heavily discounted price. It is also against the law of supply.
 Fear of being out of fashion: Quantity supplied of a commodity is
affected by fashion, taste and preferences of the consumer,
technology and time. If the seller thinks that the goods are going to
be outdated in the near future, he sells more at a lower price which
is also against the law of supply.
 Perishable Goods: In cases of perishable goods, the
supplier would offer to sell more quantities at lower
prices to avoid losses due to damage to the product.
 Agricultural Products: Since the production of
agricultural products cannot be increased beyond a
certain limit, the supply can also not be increased beyond
this limit even if the prices are higher; the producer is
unable to offer more quantities.
 Artistic and Auction Goods: The supply of such goods
cannot be increased or decreased easily according to its
demand. Thus, it is difficult to offer more quantities even
if the prices shoot up.
 Change in Technology and Cost of Production: A change in
technology and cost of production may change the quantity
supplied even if price remains unchanged.
 Taxes: The imposition of taxes in the production of goods limits
profitability. If a producer is required to remit a portion of sales
as tax, then the producer will be less inclined to increase supply.
 Legislations : Certain regulatory laws or quotas may be put in
place that limit the quantity of a given product that can be
produced. For example, in the energy industry, carbon offsets
limit the amount certain companies can supply.
 Periods of Uncertainty: During war or civil unrest, for
example, producers are more than eager to sell, even possibly at
a lower price.
Movement along the Supply Curve
• When the price of a commodity changes, other
factors kept constant, the quantity supplied of a
commodity changes, these changes are referred
to as a change in quantity supplied or
movement along the supply curve.
• A change in price causes a movement along the

supply curve. It can either be-
 Contraction (less supply) of supply
or
 Expansion/extension (more supply) of supply
Movement along the Supply Curve…………………….cont.
• Expansion of supply
If the prices increase, other factors kept constant, there is an
increase in the quantity supplied which is referred to as an
expansion of supply. Graphically, this is represented as an
upward movement along the same supply curve.
• Contraction of supply
If the prices decrease, keeping other factors constant, there
is a decrease in the quantity supplied which is referred to as a
contraction of supply. Graphically, this is represented as a
downward movement along the same supply curve.
Movement along the Supply Curve…………………….cont.
In Fig. initial supply for the commodity is OQ1 at a price of OP1.
Price
Contraction of supply:
A fall in price from P1
to P2 leads to a
P3
contraction(decrease) in
supply from Q 1 to Q 2. P1
P2
Expansion of supply: Q2 Q1 Q3
An increase in price Quantity Supplied
from P1 to P3 leads to an
expansion (increase) in
supply from Q1 to Q3.
Change in Supply or Shift in Supply
• When the supply of a commodity changes due
to change in any factor other than the own price
of the commodity, these changes are known as
change in supply or shift in supply.
• Various reasons for shift in supply curve:
 Change in technology
 Change in tax
 Change in cost of factor of production
 Change in weather condition
 Change in expectation for future prices
Change in Supply or Shift in Supply………..cont.
in the supply curve. It can either be-
 Increase in supply
 Decrease in supply
• Increase in Supply:
Increase in supply refers to a rise in the supply of a
commodity. In this case, supply rises at the same price. It leads
to a rightward shift in the supply curve.
• Decrease in Supply :
Decrease in supply refers to a fall in the supply of a
commodity. In this case, supply falls at the same price. It leads
to a leftward shift in the supply curve.
Shift in supply curve
In Fig. initial supply for the
commodity is OQ1 at a price of Price
OP1. Change in other factors
S2 S1
leads to a rightward or leftward S3
shift(increase and decrease) in
the supply curve:
P1
i. Increase in supply is shown by
rightward shift in supply curve
from S1 to S3. supply rises from
OQ1 to OQ3 due to favourable
Q2 Q1 Q3
change in other factors at the Quantity Supplied
same price OP1.
ii. Decrease in supply is shown by leftward shift in supply curve from S1 to

S2. supply falls from OQ1 to OQ2 due to unfavourable change in other
factors at the same price OP1.
Why supply curve is upward sloping
• There are three main reasons why supply curves are drawn as sloping
upwards from left to right giving a positive relationship between the market
price and quantity supplied:
• The profit motive:

When the market price rises following an increase in demand, it becomes more
profitable(given product costs, a higher price implies greater profits) for
businesses to increase their output.
• Production and costs:
When output expands, a firm's production costs tend to rise, therefore a higher
price is needed to cover these extra costs of production. This may be due to the
effects of diminishing returns as more factor inputs are added to production.
• New entrants coming into the market:
Higher prices may create an incentive for other businesses to enter the market
leading to an increase in total supply.
 Give a graphical explanation
Market Equilibrium
Equilibrium is the state in which market supply and
demand balance each other to determine a stable price
and quantity. The price of a commodity is determined
by the interaction of supply and demand in a market.
In equilibrium, the quantity of a good supplied by

producers equals the quantity demanded by consumers.
Henceforth, there exists no faltering tendency in price.
Generally, an over-supply of goods or services causes
prices to go down, which results in higher demand. The
balancing effect of supply and demand results in a state
of equilibrium.
Market Equilibrium………….cont.
Price Quantity Quantity Excess Demand or

Demanded Supplied Excess Supply
20 1200 200 1000(Excess Demand)
40 900 400 500(Excess Demand)
60 600 600 0(Equilibrium)
80 300 800 500(Excess Supply)
100 0 1000 1000(Excess Supply)
Market Equilibrium………….cont.
In the above figure, we
notice that, when price is
above 60, supply exceeds Excess Supply
_____________________
demand that forces price
to wane. Conversely, at
price below 60, demand
exceeds supply that forces _______________________
the price to rise. Only at Excess Demand
price 60, demand equals
supply and there is no
tendency of price to move
away this equilibrium
price.
In equilibrium, Demand and supply are equal that result a stable
price and quantity known as equilibrium price and equilibrium
quantity.
Shifts of Market Equilibrium
• Equilibrium is reached by equating demand and supply. So, if there is any
change in supply, demand or both the market equilibrium would definitely
change.
• Graphically, changes in the underlying factors that affect demand and

supply will cause shifts in the position of the demand or supply curve at every
price. Whenever this happens, the original equilibrium price will no longer
equate demand with supply, and price will adjust to bring about a return to
equilibrium.
• The causes of a change in Equilibrium point:

• Shift in Demand- (i) Demand shifts to the right
(ii)Demand shifts to the left
 Shift in Supply- (i) Supply shifts to the right
(ii)Supply shifts to the left
Shifts of Market Equilibrium……………cont.
Shift in Demand
Demand shifts to the right or Increase in Demand
When there is an increase in demand,
with no change in supply, the demand
curve tends to shift rightwards. As the
demand increases, a condition of excess
demand occurs at the old equilibrium
price. This leads to an increase in
competition among the buyers, which in
turn pushes up the price.
Of course, as price increases, it serves as an incentive for suppliers to
increase supply and also leads to a fall in demand. It is important to
realize that these processes continue to operate until a new
equilibrium is established. Effectively, there is an increase in both the
equilibrium price and quantity.
Demand shifts to the left or Decrease in Demand
Under conditions of a decrease in
demand, with no change in supply, the
demand curve shifts towards left. When
demand decreases, a condition of excess
supply is built at the old equilibrium
level. This leads to an increase in
competition among the sellers to sell
their produce, which obviously
decreases the price.
Now as for price decreases, more consumers start demanding the good
or service. Observably, this decrease in price leads to a fall in supply and
a rise in demand. This counter mechanism continues until the conditions
of excess supply are wiped out at the old equilibrium level and a new
equilibrium is established. Effectively, there is a decrease in both the
equilibrium price and quantity.
• Shift in Supply
• Supply shifts to the right or Increase in Supply
When supply increases, accompanied
by no change in demand, the supply
curve shift towards the right. When
supply increases, a condition of excess
supply arises at the old equilibrium
level. This induces competition among
the sellers to sell their supply, which in
turn decreases the price.
This decrease in price, in turn, leads to a fall in supply and a rise in

demand. These processes operate until a new equilibrium level is attained.
Lastly, such conditions are marked by a decrease in price and an increase
in quantity.
• Supply shifts to the left or Decrease in Supply
When the supply decreases,
accompanied by no change in demand,
there is a leftward shift of the supply
curve. As supply decreases, a
condition of excess demand is created
at the old equilibrium level.
Effectively there is increased
competition among the buyers, which
obviously leads to a rise in the price.
An increase in price is accompanied by a decrease in demand
and an increase in supply. This continues until a new equilibrium
level is attained. Further, there is a rise in equilibrium price but a
fall in equilibrium quantity.
THANK YOU
MY DEAR STUDENTS
Microeconomics
Jannatul Ferdoushi
CHAPTER-2
&
 Producer Surplus
 Elasticity
 Elasticity of Demand
 Types Elasticity of Demand
 Price Elasticity of Demand
 The Cross-Price Elasticity of Demand
 Income Elasticity of Demand
CONTENTS  Price Elasticity of Demand
 Types or Degrees of Price Elasticity of Demand
 The Cross-Price Elasticity of Demand
 Types of Cross-Price Elasticity of Demand
 Income Elasticity of Demand
 Types Income Elasticity of Demand
Producer surplus
 Producer surplus is a measure of producer welfare.
 Producer surplus is difference between the minimum price that
the producers are willing to supply or sell their commodity at
and the actual price they receive from consumers in exchange
of the commodity.
 As the MC curve is the supply curve of a firm, Producers would
be willing to supply the goods at a price just equal to MC of
each good. But, the producers actually receive the market price
for each unit of goods which is well above the MC of the
products. Thus producers have a surplus by amount of the
difference between market price and MC of each unit, the
aggregate surplus is the Producers surplus.
 So, producer surplus is the difference between the price
received for a product and the marginal cost to produce it.
Producer surplus…………..cont.
 Graphically, producer surplus is the area above the supply curve
and below the equilibrium market price.
In the given figure, DD is a linear

demand curve, SS is a linear
supply curve and O is the point of
equilibrium where Q amount of
commodity is supplied at price P.
Thus, in the above figure, the area
of ΔNOP gives producer surplus.
 An increase in the market price for the good or decreases in the

supply cost of the goods results in an increase in the Producer surplus.
Conversely, a decrease Producer supply will come about due to a
decreases in the market price or increase in supply cost of goods.
Elasticity
In economics, elasticity is the

measurement of the percentage change of
one economic variable in response to a
change in another.
Elasticity of Demand
• Elasticity of demand refers to the degree of
responsiveness of quantity demanded of a
good to a change in its price, consumers’
income and prices of related goods.
 Types elasticity of demand

 Price Elasticity of Demand
 Cross-Price Elasticity of Demand
 Income Elasticity of Demand
Price Elasticity of Demand:
 Elasticity of demand refers to price elasticity of
demand. It is the degree of responsiveness of
quantity demanded of a commodity due to change
in price, other things remaining the same.
 Mathematical Expression of Price Elasticity of
Demand
The price elasticity of demand is defined as the

percentage change in quantity demanded due
to certain percentage change in price.
• Price elasticity of demand,
Percentage change in quantity demanded ∆q%
Ep = ( )
Percentage change in price ∆p%
Change in quantity demanded

Original quantity demanded
= Change in price
Original price
∆q
q
= ∆p
p EP= Price elasticity of demand
q = Original quantity demanded
∆q =Change in quantity demanded
∆q p
... Ep = × P = Original price
∆p q ∆p = Change in price
Calculation of Price Elasticity of Demand
 Suppose that price of a commodity falls down from10 Tk to 9 Tk
per unit and due to this, quantity demanded of the commodity
increased from 100 units to 120 units. What is the price elasticity
of demand?
 Give that, p= initial price= 10 Tk
q= initial quantity demanded= 100 units
∆p=change in price= (10-9) Tk = 1 Tk
∆q=change in quantity demanded = (120-100) units
= 20 units
,
The quantity demanded

increases by 2% due to
fall in price by 1 Tk.
Types or degrees of price elasticity of demand
There are 5 types of price elasticity of demand:
1. Perfectly Elastic Demand (EP = ∞)
The demand is said to be perfectly elastic if the quantity demanded
increases infinitely (or by unlimited quantity) with a small fall or no
change in price or quantity demanded falls to zero with a small rise in
price.
Thus, it is also known as infinite elasticity.
Fig: Perfectly elasticity of demand

The demand curve DD is a
horizontal straight line parallel
to the X-axis. It shows that
negligible change in price
causes infinite fall or rise in
quantity demanded.
Types of price elasticity of demand………..Cont.
2. Perfectly Inelastic Demand (EP = 0)
The demand is said to be perfectly inelastic if
the demand remains .
constant whatever may be
the price (i.e. price may rise or fall). Thus it is
also called zero elasticity.
a
The demand curve DD is a vertical
straight line parallel to the Y-axis. It
shows that the demand remains P2 --------------------
constant whatever may be the change
in price. For example: even after the P1 --------------------
increase in price from OP to OP2 and
fall in price from OP to OP1, the a M
quantity demanded remains at OM. Fig: Perfectly Inelastic Demand
3. Relatively Elastic Demand (EP> 1)
o The demand is said to be relatively elastic if the
percentage change in demand is greater than the
percentage change in price i.e. if there is a greater
change in demand due to a small change in price. It
is also called highly elastic demand or simply elastic
demand.
 For example: If the price falls by 5% and the demand
rises by more than 5% (say 10%), then it is a case of
elastic demand.
 The demand for luxurious goods such as car,
television, furniture, etc. is considered to be elastic.
Fig: Elastic demand, (EP > 1)

The demand curve DD is
more flat, which shows that
the demand is elastic. The
∆D>∆P small fall in price from OP
to OP1 has led to greater
increase in demand from OM
to OM1. Likewise, demand
decrease more with small
increase in price.
4. Relatively Inelastic Demand (Ep< 1 )

 The demand is said to be relatively inelastic if
the percentage change in quantity demanded is
less than the percentage change in price i.e. if
there is a small change in demand with a greater
change in price. It is also called less elastic or
simply inelastic demand.
 For example: when the price falls by 10% and
the demand rises by less than 10% (say 5%),
then it is the case of inelastic demand.
 The demand for goods of daily consumption
such as rice, kerosene, etc. is said to be
inelastic.
Fig: Elastic demand, (EP > 1)

The demand curve DD is
∆D<∆P steeper, which shows that the
demand is less elastic. The
greater fall in price
from OP to OP1 has led to
small increase in demand
from OM to OM1. Likewise,
greater increase in price leads
to small fall in demand.
5. Unitary Elastic Demand ( Ep = 1)

 The demand is said to be unitary elastic if the percentage
change in quantity demanded is equal to the percentage
change in price. It is also called unitary elasticity. For
example, 1% change in price leads to exactly 1% change
in quantity demanded.
The demand curve DD is a
rectangular hyperbola, which
shows that the demand is unitary
elastic. The fall in price
from OP to OP1 has caused equal
proportionate increase in demand
from OM to OM1. Likewise, when
price increases, the demand
decreases in the same proportion.
The Cross-Price Elasticity of Demand
 The cross-price elasticity of demand is the
degree of responsiveness of quantity demanded
of a commodity due to the change in the price
of it’s substitute/complementary commodity.
 Mathematical Formula for Cross Elasticity
of Demand:
• Cross elasticity of demand is the percentage
change in the quantity demanded of good X due
to certain percent change in the price of good Y
(Substitute / complementary goods of X).
Cross-price elasticity of demand …………....Cont.
Ec
∆Py
Py
Qx
Ec =
Qx
Cross Elasticity of Demand ………Cont.
 Numerical Example:
Tea and coffee are substitutes to each other. If the price of coffee rises from
Tk.10 per 100 gram to Tk.15 per 100 gram and as a result, consumer demand
for tea increases from 30 grams to 40 grams, find out the cross elasticity of
demand between tea and coffee.
we suppose tea as good x and coffee as good y.
.
TK
TK
Thus, the coefficient of cross elasticity is 2/3

which shows that the quantity demanded for tea
increases 2% when the price of coffee rises by
3%.
• Types of Cross Elasticity of Demand
 Positive cross elasticity of demand (EC>0)
• If rise in price of one good leads to rise in quantity
demanded of other good of a similar nature(substitute
goods) and vice versa, it is known as positive cross
elasticity of demand. Positive cross elasticity exists
between two goods which are substitutes of each other.
In the above figure, quantity
demanded for Coke and price of
Pepsi are measured along X-axis and
Y-axis respectively. When the price
of Pepsi increases from OP to OP1,
quantity demanded for coke rises
from OQ to OQ1 and vice versa.
Thus, the demand curve DD shows
positive cross elasticity of demand.
 Negative cross elasticity of demand (EC<0)
• In case of complementary goods, cross elasticity of
demand is negative. If the rise in price of one good leads
to fall in quantity demanded of its complementary good
and vice versa, it is known as negative cross elasticity of
demand.
In the above figure, quantity
demanded for Tea and price of
Sugar are measured along X-axis
and Y-axis respectively. When the
price of Sugar increases
from OP to OP1, quantity
demanded for Tea falls from OQ
to OQ1 and vice versa. Thus, the
demand curve DD shows negative
cross elasticity of demand.
• Zero cross elasticity of demand (EC=0)
• Cross elasticity of demand is zero when two goods are
not related to each other. For instance, increase in price of
car does not effect the demand of cloth. Thus, cross
elasticity of demand is zero.
Cs = Zero
Y
Price of Y
If substitutability does not
exist, cross elasticity is
zero. Thus the demand
curve is vertical.
a
X
Quantity of X
Income Elasticity of Demand
• Income elasticity of demand is the
degree of responsiveness of quantity
demanded of a commodity due to change
in consumer’s income, other things
remaining constant.
The price elasticity of income is defined
as the percentage change in quantity
demanded due to certain percentage
change in income.
• Expression of Income Elasticity of Demand
∆𝒒
𝒒
∆𝒚
𝒚
∆𝒒 𝒚
×𝒒
∆𝒚
Where, EY = Income elasticity of demand

q = Original quantity demanded
∆q = Change in quantity demanded
y = Original consumer’s income
∆y= Change in consumer’s income
• Example to Explain Income Elasticity of Demand
• Suppose that the initial income of a person is Tk.2000 and quantity
demanded for the commodity by him is 20 units. When his income
increases to Tk.3000, quantity demanded by him also increases to
40 units. Find out the income elasticity of demand.
Solution:
Here, q = 100 units
∆q = (40-20) units = 20 units
y = Rs.2000
TK
∆y =Rs.
TK (3000-2000) =Rs.1000
TK
Now,
• Hence, an increase of Tk.1000 in income i.e. 1% in income leads to

a rise of 2% in quantity demanded.
• Types of Income Elasticity of demand
 Positive income elasticity of demand (EY>0)
• If there is direct relationship between income of the

consumer and demand for the commodity, then income
elasticity will be positive. That is, if the quantity
demanded for a commodity increases with the rise in
income of the consumer and vice versa, it is said to be
positive income elasticity of demand.
• For example:
As the income of consumer increases, they consume more of
superior (luxurious) goods. On the contrary, as the income of
consumer decreases, they consume less of luxurious goods.
• Positive income elasticity can be further classified into three
types:
 Income elasticity greater than unity (EY > 1)
• If the percentage change in quantity demanded for a commodity
is greater than percentage change in income of the consumer, it
is said to be income greater than unity. For example: When the
consumer’s income rises by 3% and the demand rises by 7%, it
is the case of income elasticity greater than unity.
In the given figure, quantity demanded
and consumer’s income is measured
along X-axis and Y-axis respectively. The
small rise in income from OY to OY1 has
caused greater rise in the quantity
demanded from OQ to OQ1 and vice
versa. Thus, the demand curve DD shows
income elasticity greater than unity.
 Income elasticity equal to unity (EY = 1)
is equal to percentage change in income of the consumer, it is
said to be income elasticity equal to unity. For example: When
the consumer’s income rises by 5% and the demand rises by
5%, it is the case of income elasticity equal to unity.
In the given figure, quantity
demanded and consumer’s income is
measured along X-axis and Y-axis
respectively. The small rise in income
from OY to OY1 has caused equal
rise in the quantity demanded
Thus, the demand curve DD shows Q Q1
Quantity demanded
income elasticity equal to unity.
 Income elasticity less than unity (EY < 1)
is less than percentage change in income of the consumer, it is
said to be income greater than unity. For example: When the
consumer’s income rises by 5% and the demand rises by 3%, it
is the case of income elasticity less than unity.
In the given figure, quantity
demanded and consumer’s income
is measured along X-axis and Y-
axis respectively. The greater rise in
income from OY to OY1 has caused
small rise in the quantity demanded
Thus, the demand curve DD shows Q Q1
income elasticity less than unity. Quantity demanded

 Negative income elasticity of demand ( EY<0)
• If there is inverse relationship between income of the consumer
and demand for the commodity, then income elasticity will be
negative. That is, if the quantity demanded for a commodity
decreases with the rise in income of the consumer and vice versa, it
is said to be negative income elasticity of demand. For example:
• As the income of consumer increases, they either stop or consume
less of inferior goods.
In the given figure, quantity demanded and
consumer’s income is measured along X-
axis and Y-axis respectively. When the
consumer’s income rises
from OY to OY1 the quantity demanded of
inferior goods falls from OQ to OQ1 and
vice versa. Thus, the demand
curve DD shows negative income elasticity Q Q1
Quantity demanded
of demand
 Zero income elasticity of demand ( EY=0)
• If the quantity demanded for a commodity remains constant with
any rise or fall in income of the consumer and, it is said to be
zero income elasticity of demand. For example: In case of basic
necessary goods such as salt, kerosene, electricity, etc. there is
zero income elasticity of demand.
In the given figure, quantity demanded and

consumer’s income is measured along X-axis
and Y-axis respectively. The consumer’s
income may fall to OY1 or rise
to OY2 from OY, the quantity demanded
remains the same at OQ. Thus, the demand
curve DD, which is vertical straight line
parallel to Y-axis shows zero income Q
Quantity demanded
elasticity of demand.
THANK YOU
MY DEAR STUDENTS
Microeconomics
Jannatul Ferdoushi
CHAPTER-2
&
 Measurement of Price Elasticity of Demand
 Percentage Method.
 Total Expenditure/outlay Method.
 Geometric Method or Point Elasticity Method.
 Arc Method.
 Difference Between Elastic and Inelastic Demand
CONTENTS  Price Elasticity of Supply
 Types of Price Elasticity of Supply
 Relatively elastic supply

 Relatively inelastic supply
 Unitary elastic supply
 Infinite/perfectly elastic supply
 Zero /perfectly inelastic supply
Measurement of Price Elasticity of
Demand:
There are four methods of measuring price
elasticity of demand:
(1) Percentage Method.

(2) Total Expenditure/Total Outlay Method.
(3) Geometric Method or Point Elasticity Method.
(4) Arc Method.
These four methods are now discussed in brief:

(1) Percentage Method
Percentage method is the most commonly used approach of
measuring price elasticity of demand. In this method price elasticity
is measured as the ratio of percentage change in quantity demanded
to percentage change in price.
• According to this method, price elasticity of demand can be
expressed as
(2) Total Expenditure Method/Total Outlay Method:
• The price elasticity can be measured by the changes in total

expenditure brought about by changes in price and quantity
demanded.
• (i) When with a fall in price, the quantity demanded increases so
much that it results in the increase in total expenditure,
the demand is said to be elastic or greater than one, i.e., Ed > 1.
• For Example:
Price Per Quantity Total

Unit Demanded Expenditure
20 10 Pens 200.0
10 30 Pens 300.0
The figure shows that at price
of 20 TK per pen, the quantity
demanded is 10 pens, the total
expenditure OABC (200 TK).
When the price falls to 10 TK,
the quantity demanded of pens
is 30. The total expenditure is
OEFG (300 TK).
• Since OEFG is greater than OABC, it implies that change

in quantity demanded is proportionately more than the
change in price. Hence the demand is elastic (more than
one) Ed > 1.
• (ii) When a fall (rise) in price raises
(reduces) the quantity demanded so
much as to leave the total expenditure
unchanged, the elasticity of demand is
said to be unitary (Ed = 1).
• For Example:
Price Per Quantity Total
Pen Demanded Expenditure
10 30 300
5 60 300
Price
Y
The figure shows that at D
price of 10 Tk per pen,

the total expenditure is
A B
OABC (300 Tk). At a 10
lower price of 5 Tk, the 5 E F

D
total expenditure is
C G X
OEFG (300). 0 30 60
Quantity demanded
• Since OABC = OEFG, it implies that the change in

quantity demanded is proportionately equal to change in
price. So the price elasticity of demand is equal to one,
i.e., Ed = 1.
• (iii) When a fall (rise) in price raises
(reduces) the quantity demanded of a
good so as to cause the total expenditure
to decrease, the demand is said to be
inelastic or less than one, i.e., Ed < 1.
• For Example:
Price Quantity Total
Per Pen Demanded Expenditure
5 60 300
2 100 200
In the fig at a price of 5 Tk per
pen the quantity demanded is
50 pens. The total expenditure
is OABC (300 Tk). At a lower
price of 2 Tk, the quantity
demanded is 100 pens. The
total expenditure is OEFG
(Tk. 200).
• Since OEFG is smaller than OABC, this implies
that the change in quantity demanded is
proportionately less than the change in price. Hence
price elasticity of demand is less than one or
inelastic.
(3) Geometric Method/Point Elasticity Method:
 The measurement of elasticity at a point of

the demand curve is called point elasticity.
 The price elasticity of demand can be
measured at any point on the demand curve.
 The point elasticity of demand is defined as
the proportionate change in the quantity
demanded due to a very small proportionate
change in price at any point of the demand
curve.
 Demand curve can be Linier and Non-linier.
(i) Measurement of Elasticity on a Linear Demand Curve:
• If the demand curve is linear (straight line), it has a

unitary elasticity at the mid point. The total revenue is
maximum at this point.
• Any point above the midpoint has an elasticity greater

than 1, (Ed > 1). Here, price reduction leads to an
increase in the total revenue (expenditure).
• Any point below the midpoint has an elasticity less

than 1. (Ed < 1). Here price reduction leads to
reduction in the total revenue of the firm.
• According to this method, price elasticity of demand (PED) is
expressed as
.
Price
Quantity Demanded
• According to this method, price elasticity of demand (PED) is
mathematically expressed as
(Here C is the mid-point of the demand curve AE)
Ep = ∞
Ep > 1
Ep = 1
Ep < 1
Ep = 0
• Price elasticity on a non-linear demand
curve
• If the demand curve is non-linear or
convex nature, then a tangent line is
drawn at the point of which the PED is
to be measured.
• Then PED is once again calculated as
In the given figure, DD is
a non-linear demand
curve. To measure price
elasticity at point P , a
tangent MN has been
drawn through point P.
Now, PED can be
measured as
(4) Arc Method
• Any two points on a demand curve make an
arc. Arc elasticity is a measure of average
elasticity between any two points on the
demand curve.
• This method is used to find out price

elasticity of demand over a certain range of
price and quantity. Thus, this method is
applied when the change in price or quantity
demanded of the commodity occurs at a
large scale or a greater volume.
In the figure, we can see that AB is an arc on the demand curve DD,
and point C is the mid-point on AB.
PED at point C
. C
• Using arc-elasticity of demand
Q −Q P +P
Arc-elasticity = Q1 + Q2 × P1 − P2
1 2 1 2
6 − 15 100 + 150
= ×
6 +15 100 − 150
− 9 250
= ×
25 − 50
9
... Arc-elasticity =
5
Difference Between Elastic and Inelastic
Demand
Basis for Elastic Demand Inelastic Demand
Comparison
Meaning In the case of elastic In the case of inelastic
demand, the demand demand, the demand is quite
remains very volatile and sluggish/sticky to a change
changes significantly to any in the price of the product.
slight change in the price of
the product.
Elasticity If the coefficient of If the coefficient of
Quotient elasticity of demand is elasticity of demand is less
greater than, equal to 1, than one the demand is said
then the demand is elastic. to be inelastic.
Shape of When the demand is If the demand is inelastic,
the curve elastic, the shape of the the shape of the curve is
curve is slightly flatter. relatively steeper.
Elastic Demand Inelastic Demand
Quantity Demanded Quantity Demanded

Basis for Elastic Demand Inelastic Demand
Comparison
Price and In case of elastic demand, In inelastic demand, the
Total the price and total revenue price and total revenue
revenue move in opposite direction. moves in the same
direction.
Nature of Items of comforts and Items of necessity have an
Products luxuries have elastic inelastic demand.
demand.
Availability In elastic demand, substitute In inelastic demand, less
of Substitute for the product will be or no substitute available.
available.
Price In elastic demand, products In inelastic demand,
sensitivity or commodities are more products or commodities
sensitive to the price are less sensitive to the
changes. price changes.
Price Elasticity of Supply:
 Elasticity of supply refers to the degree of
responsiveness of quantity supplied of a
commodity due to change in price, other
things remaining the same.
In simple words, it can be defined as the
percentage change in quantity supplied
due to certain percentage change in
price.
• It is denoted as PES or Es.
• Mathematically, price elasticity of supply
is expressed as
Degrees or Types of Price Elasticity of
Supply
• The degree of elasticity of supply can be of
five types.
(1)Relatively elastic supply
(2)Relatively inelastic supply
(3)Unitary elastic supply
(4)Infinite/perfectly elastic supply
(5)Zero /perfectly inelastic supply
• They are described below.

(1)Relatively elastic supply
• When percentage change in quantity
supplied is greater than percentage
change in price, the condition is known
as relatively elastic supply.
• Elasticity tends to be greater than 1 in
case of products which are not necessary
to sustain our lives. Luxury goods such
as expensive smart phone, gold, etc.
show this kind of price elasticity.
This situation when plotted in graph makes an
upward slope which intersects positive Y-axis.
In figure, we can see

that ratio of change in
quantity supplied is
greater than the ratio of
change in price. As a
result, we get PES>1.
(2)Relatively inelastic supply
• When the percentage change in quantity
supplied is lesser than percentage change
in price, the condition is known as
relatively inelastic supply.
• Such kind of price elasticity can be
observed in goods which are necessary
in our day to day lives. Clothes, foods,
etc. are good examples of these kinds of
goods.
This situation when plotted in graph makes highly
inclined upward slope which intersects positive X-
axis.
In the figure, it is
clearly shown that ratio
of change in price is
greater than ratio of
change in quantity,
then we get PES<1.
(3)Unitary elastic supply
• When percentage change in quantity
supplied is exactly equal to
percentage change in price, the
situation is known as unitary elastic
supply.
• This situation is graph is represented
by an upward slope which intersects
the origin.
In the above figure,
the ratio of change in
quantity supplied is
equal to the ratio of
change in price.
Consequently, we get
PES=1.
(4)Infinite/perfectly elastic supply
• When a slight or minimal change in

price causes infinite change in
quantity supplied, it is said to be
infinite or perfectly elastic supply.
• This kind of price elasticity is

expected to occur in highly luxurious
goods.
In a graph, such situation is represented by a
straight line which is parallel to X-axis.
In the above figure, we

can see that quantity
supplied has varied
significantly even at
the same price level.
(5)Zero /perfectly inelastic supply
• When quantity supplied remains
unchanged with change in price, it is
said to be zero or perfectly inelastic
supply.
• This type of price elasticity is expected

to be observed in highly essential goods
such as medicines.
Such situation in graph is represented by a straight
line which is parallel to Y-axis.
In figure, we can see

that the amount of
commodity supplied
has remained
unchanged even when
the price has greatly
changed.
THANK YOU
MY DEAR STUDENTS
Class- BBA (Professional)
Batch – 22nd ( All Sections)
Dhaka City College
Course Teacher: Nadira Jahan Chowdhury

Assistant Professor
Dept. of Economics
Dhaka City College
The Theory of Consumer
Behavior
Reference Book
Name of the Text Book
1. Economics -- P. A. Samuelson & W.D. Nordhaus
2. Modern Microeconomics : Theory & Policy--- H. L. Ahuja
3. Modern Economic Theory—Dr. K. K. Dewett & M. H.

Navalur
Content
 Definition of Consumer Behavior
 Concept of Utilitarianism
 What is Utility?
 Utility Function
 Cardinal & Ordinal Measures of Utility
 Concept of Total & Marginal Utility
 Law of Diminishing Marginal Utility
What is Consumer Behavior?
 Consumer behavior is the study of how individual

customers, groups or organizations select, buy, use,
and dispose ideas, goods, and services to satisfy their
needs and wants.
 It refers to the actions of the consumers in the

marketplace and the underlying motives for those
actions.
Nature of Consumer Behavior
1. Influenced by Various Factors:
 The various factors that influence the consumer
behavior are as follows:
 Marketing factors such as product design, price, promotion,
packaging, positioning and distribution.
 Personal factors such as age, gender, education and income
level.
 Psychological factors such as buying motives, perception of the
product and attitudes towards the product.
 Situational factors such as physical surroundings at the time of
purchase, social surroundings and time factor.
 Social factors such as social status, reference groups and family.
Cont….
2. Undergoes a Constant Change
 Consumer behavior is not static. It undergoes a change
over a period of time depending on the nature of products.
For example, kids prefer colorful and fancy footwear, but
as they grow up as teenagers and young adults, they prefer
trendy footwear.
3. Varies from Consumer to Consumer

 All consumers do not behave in the same manner.
Different consumers behave differently. The differences in
consumer behavior are due to individual factors such as
the nature of the consumers, lifestyle and culture.
Cont….
4. Varies from Region to Region and Country to County:
 The consumer behavior varies across states, regions and
countries.
 For example, the behavior of the urban consumers is
different from that of the rural consumers. A good number
of rural consumers are conservative in their buying
behaviors.
5. Information on Consumer Behavior is Important to

the Marketers:
 Marketers need to have a good knowledge of the consumer
behavior. They need to study the various factors that
influence the consumer behavior of their target customers.
What is Utilitarianism?
 Utilitarianism is a theory of morality, which advocates
actions that foster happiness or pleasure and opposes
actions that cause unhappiness or harm.
 When directed toward making social, economic, or

political decisions, a utilitarian philosophy would aim
for the betterment of society as a whole.
 Utilitarianism would say that an action is right if it

results in the happiness of the greatest number of
people in a society or a group.
Axioms of Utilitarianism
The three generally accepted Axioms of Utilitarianism
State that---
 Pleasure, or happiness, is the only thing that has
intrinsic value.
 Actions are right if they promote happiness, and

wrong if they promote unhappiness.
 Everyone's happiness counts equally.

History of Utilitarianism
 Jeremy Bentham describes his "greatest happiness

principle" in Introduction to the Principles of
Morals and Legislation, a 1789 publication, in which
he writes:
"Nature has placed mankind under the governance of
two sovereign masters, pain and pleasure. It is for
them alone to point out what we ought to do, as well as
to determine what we shall do."
What is Utility?
 It is a measure of satisfaction an individual gets from
the consumption of the commodities.
“ The satisfaction a house hold receives from

consuming a commodity is called Utility’’.
----------Prof. R. G. Lipsey
 A Utility of a good differs from one consumer to

another.
 It keeps on changing for the same consumer due to
change in the amount of desires.
 It should not be equated with its usefulness.
Utility Function
 It expresses the functional relationship between utility

level and the quantity of consumption of different
goods at a certain period of time.
Types of Utility Function---

(a) U1 = f (X1, X2) :
Here utility depends on the consumption of X1 good
with the consumption of X2 good remain Constant.
This function is used to explain the ‘Law of
Diminishing Marginal Utility’.
Utility Function
(b) U2 = f (X1, X2) :

Here utility depends on the consumption of both the
commodity. This function is used to describe the
‘Indifference Curve Analysis’.
(c) U3 = f (X1, X2 , ………, Xn) :

Here Utility is the function of all variable commodity.
This function is used to explain the ‘Law of Equi-
Marginal Utility’.
Cardinal And Ordinal Measures of
Utility
The two principal theories for the utility measurement
are Cardinal Utility and Ordinal Utility.
 Cardinal utility is the utility wherein the satisfaction

derived by the consumers from the consumption of
goods or services can be expressed numerically.
 Ordinal utility states that the satisfaction which a

consumer derives from the consumption of goods or
services cannot be expressed numerical units, but
measured in preference order or rank order.
Differences between Cardinal & Ordinal
Utility
Fig – Cardinal & Ordinal Utility
Fig- Cardinal Utility Fig- Ordinal Utility

Total Utility
 Total utility is the total satisfaction received from

consuming a given total quantity of a goods or services
of a commodity.
 According to Prof. Bradley & R. Shiller ---

“The amount of total satisfaction obtained from
entire consumption of a commodity is called Total
Utility”.
Formula of TU:
TU = MU1 + MU2 + ………+ MUn = ⅀ MUi
Here,
TU = Total Utility
MU1, MU2 ,………, MUn = Marginal Utility of Different
Unit of a Specific Commodity.
Marginal Utility
 The additional utility from consuming one additional unit

of a commodity is known as Marginal Utility.
 In other way, the change in total utility (TU) due to the

change in consumption is known as Marginal Utility (MU).
According to Prof. R.G. Lipsey---

“Marginal Utility refers to the change in satisfaction
resulting from consuming a little more or little less of
that commodity”.
Formula of Marginal Utility:
MU =
or, MU = 𝞓 TU/𝞓Q ;
Here,
𝞓TU = Change in Total Utility and
𝞓Q = Change in Consumption
Relation Between Total & Marginal
Utility
Law of Diminishing Marginal Utility
 According to Alfred Marshall—
“The additional benefit that a person derives from a given
increase of his stock of anything diminishes with the
growth of the stock that he already has”.
Assumptions:
 Cardinal measure of utility.
 Preference, tastes & habit of consumer remain fixed.
 Homogenous product.
 Rational behavior.
 Income & price of the goods remain constant.
 Price of substitutes and complementary goods remain constant.
 The quality of successive units of goods should remain the same.
Example
Exceptions of the Law
Class- BBA (Professional)
Batch – 22nd ( All Sections)
Dhaka City College
Course Teacher: Nadira Jahan Chowdhury

Assistant Professor
Dept. of Economics
Dhaka City College
 Derive the Demand Curve from Marginal
Utility (MU) Curve
 Concept of Consumer’s Surplus
 Law of Equi-Marginal Utility

 An explanation of the Law of Demand and the
negatively-sloped demand curve based on Utility Analysis
and The Law of Diminishing Marginal Utility.
 The law of diminishing marginal utility states that

marginal utility declines as consumption increases.
 Because demand price depends on the marginal utility

obtained from a good, price also declines as consumption
increases, meaning price and quantity demanded are
inversely related, which is the law of demand.
 Consumer Surplus is defined as the differences between
the consumers' willingness to pay for a commodity and
the actual price paid by them, or the equilibrium price.
 Graphically, it can be determined as the area below the

demand curve (which represents the consumer's
willingness to pay for a good at different prices) and
above the price line.
 It is positive when, what the consumer is willing to pay

for the commodity is greater than the actual price.
Amount Utility/Demand Market Price Consumer’s
Price Surplus
1st unit Tk. 8 Tk. 2 Tk. 6
2nd unit Tk. 6 Tk. 2 Tk. 4
3rd unit Tk. 4 Tk. 2 Tk. 2
4th unit Tk. 2 Tk. 2 Tk. 0
Total Unit = 04 Total =Tk. 20 Total = Tk. 08 Total = Tk. 12

 From the above schedule we can see that, the consumer
is willing to pay higher price for initial unit but lower
price for later unit of a commodity.
 But constant market price creates a difference between
buyer’s demand price and actual payments.
 As a result, higher amount of surplus arises initially
and after a certain stage, consumer’s surplus falls due to
Diminishing Marginal Utility.
 Here, Total Consumer’s Surplus = tk.(20-08) = tk.12
 The law of Equi-Marginal Utility states that the
consumer will distribute his money income between the
goods in such a way that the utility derived from the last
tk. spend on each good is equal.
 In other words, consumer is in equilibrium position when

marginal utility of money expenditure on each good is the
same.
 Now, the marginal utility of money expenditure on a good

is equal to the marginal utility of goods divided by the
price of the goods.
 Consumer is in equilibrium in respect of two goods ‘X’ & ‘Y’
when:
MUm= MUx/Px = MUY/PY
Here,
Mum = Marginal Utility of Money Expenditure
Mux = Marginal Utility of ‘X’ Commodity
Px = Price of ‘X’ Commodity
MUY = Marginal Utility of ‘Y’ Commodity
PY = Price of ‘Y’ Commodity
 If, MUX/PX > MUY/PY then the consumer will substitute

good ‘X’ for good ‘Y’. As a result, the MU of ‘X’ will fall and
MU of ‘Y’ will rise until MUX/PX = MUY/PY .
 Consumers are rational.
 Utility can be described in cardinal terms (e.g.
monetary units).
 Constant prices and incomes.
 Habit, taste of the consumer remain fixed.

 Goods can be split up into small units.
 Law of ‘Diminishing Marginal Utility’ exists.

Let the price of good ‘X’ and price of good ‘Y’ be tk. 2 & 3
respectively and the money income of the consumer is tk. 24
to spend on two goods.
Unit MUX MUY MUX/PX MUY/PY

1 20 24 10 08
2 18 21 09 07
3 16 18 08 06
4 14 15 07 05
5 12 12 06 04
6 10 09 05 03
 From the above schedule, it is clear that, MUX/PX is equal to 5
when the consumer purchase 6 unit of good ‘X’ and MUY/PY is
equal to 5 when the consumer buy 4 unit of good ‘Y’.
 Therefore the consumer is in equilibrium when he/she is buying
6 unit of good ‘X’ & 4 unit of good ‘Y’ and will be spending tk.
(2*6 + 3*4 = 24) on them.
 So in equilibrium consumer maximizes his/her utility by
equating
 or, 10/2 = 15/3 =5

 Thus marginal utility of the last tk. Spent on each of the two
goods he/she purchases is same, that is 5 utils.
MU/P & MUm
D C
MUm
MUx/Px
MUy/Py
Qn of ‘X’ and ‘Y’Good
O B A
 In the diagram, horizontal axis denotes Quantity of ‘X’ and ‘Y’
good & vertical axis measures MU/P and MUm.
 MUm line shows marginal utility of money which is limited or
fixed.
 If consumer buys OA of ‘X’ good and OB of ‘Y good then
MUx/Px will be equal to MUy/Py, which makes equilibrium.
 Because, for Good ‘X’ MUx/Px = AC and
for Good ‘Y’ MUy/Py = BD are equal
that is, AC = BD = MUm
 So, the consumer will distribute his limited money income
on both goods in such a way that the marginal utility derived
from the last taka spend on each good is equal and
maximizes his/her utility.
 The difficulty of evaluating utility.
 Consumers don’t have time to work out marginal

utility/price.
 Consumers are not always rational.
 Numerous goods.
 Often goods can’t be split up into small portions.

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Microeconomics

Department Of Business Administration

COURSE TITLE: MICRO ECONOMICS (510117)

“Political Economy or Economics is a study of mankind in the ordinary business of

 “Scarcity and Choice Definition” by Lionel Ribbons:

• From the above discussion, we summarize as

Positive Economics, is a branch of The economics that uses value

Positive Economics refers to a science Normative economics is described

Nature Positive economics is descriptive But normative economics is

Positive economics explains cause and On the other hand, normative

BASIS FOR POSITIVE ECONOMICS NORMATIVE ECONOMICS

The statements of positive The statements of normative

• A PPC is also called transformation curve because in

• A PPF explains several economic concepts, such as

Combination of Food Technology

If AB is the primary PPC of a country. CD PPC shows the country's

• Determination of opportunity cost

Points on PPF is the maximum attainable combination of

All the points on PPF are P

at best be produced with efficient use of

Considering the uses of the goods, wants can be classified

• Necessary Wants: It includes food clothes Shelters

• Comfort wants : It includes tasty foods pleasant house,

• Luxurious wants: It includes diamond rings, expensive

At point B, it would distribute more resources to

An iso- product curve can be used to describe the second

on the availability of resources in that

• For whom to produce?

Economic systems are the means by which countries and

According to J. F. Ragan & L. B. Thomas,

• Monopoly and Exploitation:

• Major Role of Government:

• Maximum Social Welfare:

• Little importance of price mechanism:

Subjects Capitalistic economy Command economy

Subjects Capitalistic economy Command economy

• According to J. F. Ragan & L. B. Thomas,

In mixed economy, private property is allowed. However, here it

• Price Mechanism and Controlled Price:

The people have freedom of consumption and to choose their

• To give a more professional definition: referring

" That branch of knowledge which helps to realize

 Concern for Poor:

Qd = f(P, Pc, Ps, Y, H, T, CN, E) is a demand function

 Complementary goods (can be used together, such as tennis balls and

 Habits, tastes and fashions remain constant

Price Quantity Demanded

If the price is 1/-, the quantity of demand is 12 units. As price

If P = 1 then, Qd = 16 - 4(1)= 16 – 4 =12

In the given figure, price and quantity demanded are measured

• Law of diminishing marginal utility

In Fig. initial demand for the commodity is OQ1 at a price of OP1.

rightward shift in demand curve

ii. Decrease in Demand is shown by

other factors at the same price OP1.

 A change in price doesn’t shift the demand curve – move from

 Shift in the demand occurs due to change in any factor other

 Supply refers to what is offered for sale and not

Sx = f (Px, Pa… Pc, PL… PO, T, Ns, St, O, G)

• Prices of other related goods: