Contents. unit I DEMAND ANALYSIS I-11. About the authors I-5 Preface I-7 Chapter-heads I-9

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1 Contents About the authors I-5 Preface I-7 Chapter-heads I-9 unit I Consumer behaviour and elasticity of demand 1 DEMAND ANALYSIS u Introduction 3 u Demand and Quantity Demanded 4 u Demand Function 4 u Determinants of demand 5 u Law of Demand 11 u Why demand curve slopes downward 13 u Linear and non-linear demand curve 14 u Market Demand 16 u Changes in Demand 18 u Exceptions to the Law of Demand 21 Chapter in Brief 22 Formulas to Remember 23 Annex Review Questions 28 I-11

2 I-12 Contents 2 SUPPLY ANALYSIS u Introduction 30 u What is supply? 31 u Supply and quantity supplied 31 u Supply function 31 u Law of supply 32 u Market supply schedule 34 u Changes in supply 36 u Factors determining supply 38 u Elasticity of supply 40 u Concept of elasticity of supply 41 u Kinds of elasticity of supply 43 u Factors affecting elasticity of supply 44 Chapter in Brief 46 Formulas To Remember 47 Review Questions 48 3 PRICE ELASTICITY OF DEMAND u Introduction 50 u Concept of price elasticity of demand 52 u Problems in the concept of elasticity of demand 54 u Slope and price elasticity of demand 55 u Types of elasticity of demand 55 u Factors affecting price elasticity of demand 58 u Measuring price elasticity of demand 60 u Theorems on elasticity of demand 77 u Relationship between revenue and price elasticity of demand 85 u Applications of price elasticity of demand 87 Chapter in Brief 88 Formulas To Remember 90 Review Questions 91 4 INCOME AND CROSS ELASTICITY OF DEMAND INCOME ELASTICITY OF DEMAND 94 u Introduction 94

3 Contents I-13 u Concept of Income elasticity of demand 95 u Types of Income elasticity of demand 98 u Importance of Income elasticity of demand 100 CROSS ELASTICITY OF DEMAND 101 u Introduction 101 u Concept of Cross elasticity 101 u Types of Cross elasticity of demand 103 u Importance of Cross elasticity of demand 104 Chapter in Brief 105 Formulas To Remember 106 Review Questions Ordinal Approach to the Consumer Behaviour u Basis of Indifference curve Approach 109 u Concept of indifference curve 111 u Marginal rate of substitution 113 u Principle of diminishing MRS 114 u Assumptions of indifference curve 114 u Indifference map 115 u Properties of indifference curve 116 u Exceptional shapes of indifference curve 121 u Perfect substitutes 122 u Perfect complements 123 u Good, bad and neutral goods 123 u Budget line 126 u Consumer s equilibrium 135 u Sum-up 142 Chapter in Brief 142 Formulas to Remember 145 Review Questions Indifference curve analysis : Price, income and substitution effects u Introduction 149 u Effect of change in prices or the price-effect 150

4 I-14 Contents u Fall in price of Product X 150 u Rise in price of Product X 152 u PCC and derivation of a demand curve : Giffen good 155 u Shape of PCC and price elasticity of demand 156 u Effect of change in income or the income-effect 159 u Income effect in case of a normal good 160 u Income effect in case of an Inferior product 162 u ICC and income elasticity 163 u ICC and nature of products 164 u ICC and demand curve 167 u Engel curve 168 u ICC and Engel curve 168 u Derivation of an Engel curve from an ICC 169 u Shape of the Engel curve 170 u Substitution effect 172 u Decomposition of price effect 174 u Decomposition of price effect in case of a normal product 174 u Decomposition of price effect : Inferior product 178 u Decomposition of price effect : Giffen good 179 u Applications of indifference curve analysis 181 u Consumer surplus 184 Chapter in Brief 185 Formulas to Remember 187 Review Questions Revealed Preference Theory u Introduction 191 u Assumptions 192 u Basis of revealed preference theory 192 u Strong ordering hypothesis 192 u Axioms of revealed preference theory 193 u Derivation of the demand curve 195 u Separation of price effect into income effect and substitution effect 196 u Criticism 197 u Contribution 197 Chapter in Brief 198 Review Questions 198

5 Contents I-15 Unit II PRODUCTION AND COST 8 Theory of Production in Short Run u Introduction 203 u Factors of production 204 u Production function 204 u Short run vs. long run 207 u Fixed vs. variable factors 208 u Short run production concepts 209 u Relationship between average product and marginal product 214 u Law of diminishing marginal returns 216 u Law of variable proportions 217 u Three stages of Production 218 u Stage I : Increasing returns 219 u Stage II: Diminishing returns 219 u Stage III: Negative returns 220 u Stage of operation 221 u Illustration of the three stages of production 221 u Sum-up 222 Chapter in Brief 223 Formulas to Remember 225 Review Questions Theory of Production in Long Run u Introduction 227 u Production function in long run 228 u Concept of isoquant 228 u Characteristics of an isoquant 230 u Marginal Rate of Technical Substitution (MRTS) 233 u Diminishing MRTS LK 235

6 I-16 Contents u MRTS: a measure of factor substitution 237 u Isoquant map 237 u Economic region of production 238 u Exceptional types of isoquants 239 u Iso-cost line 241 u Equilibrium of a producer 245 u Assumptions of a producer s equilibrium 245 u Minimizing cost subject to an output constraint 246 u Maximizing output subject to a cost constraint 247 u Expansion path 248 u Laws of returns to scale 254 u Increasing returns to scale 255 u Constant returns to scale 256 u Returns to factor and returns to scale 259 u Economies and diseconomies of Scale 263 Chapter in Brief 270 Formulas to Remember 274 Annex Review Questions COST CURVES IN SHORT RUN u Introduction 283 u Alternative cost concepts 284 u Opportunity cost or alternative cost 284 u Private cost or money cost 285 u Social cost 286 u Explicit cost, implicit cost, accounting cost and economic cost 287 u Sunk cost 288 u Sunk cost and fixed cost 289 u Cost function 290 u Cost behaviour of a firm in short run 290 u Total fixed cost (TFC) 291 u Total variable cost (TVC) 292 u Total cost (TC) 293 u Derived cost curves 294

7 Contents I-17 u Average fixed costs (AFC) 294 u Average variable cost 296 u Average cost (AC) 298 u Marginal cost 300 u Relationship between different cost curves 303 Chapter in Brief 306 Formulas to remember 307 Review Questions COST CURVES IN LONG RUN u Introduction 311 u Long run cost curves 312 u Long run total cost curve 312 u Long run average cost curve 315 u Long run marginal cost curve 319 u The Learning Curve 321 u Economies of scope 324 Chapter in Brief 325 Formulas to Remember 327 Review Questions unit III PERFECT COMPETITION Theory of Perfect Competition u Introduction 331 u Definition and characteristics of perfect competition 332 u Perfect and pure competition 334 u Revenue curves under perfect competition 335 u Equilibrium under perfect competition 337 u Conditions of equilibrium 337

8 I-18 Contents u Short run equilibrium of a firm: TR-TC method 339 u Short run equilibrium of a firm: MR-MC method 340 u Super normal profit 342 u Normal profit 342 u Firm incurring losses 343 u Minimizing losses by continuing production 344 u Shut down condition 345 u Short run equilibrium of Industry 345 u Supply curve of a firm 346 u Supply curve of industry 347 u Supply curve of Industry and time horizon 349 u Completely inelastic supply: A very short period 349 u Short run equilibrium of industry and firm 350 u Long run equilibrium of industry and firm 351 u Firm s response to a change in input price 352 u Long run supply curve and firm s equilibrium 353 u Increasing cost condition 353 u Constant cost condition 355 u Diminishing cost conditions 356 u Price determination in long run 358 u Sum up 359 Chapter in Brief 359 Formulas to Remember 361 Review Questions APPLICATIONS OF PERFECT COMPETITION u Introduction 364 u Producer s surplus of a firm 365 u Producer s surplus of an industry 366 u Producer surplus and profit 366 u Difference between producer s and consumer s surplus 368 u Government intervention and social welfare 368 u Gains and losses from a government policy of price control 370 u Gains and losses from a government policy of subsidy 373 u Impact of output tax on a firm 375

9 Contents I-19 u Impact of output tax on industry 376 u Gains and losses from a government policy of taxation-excise duty 377 u Sharing tax burden and elasticities of demand and supply 379 u Sum up 381 Chapter in brief 381 Formulas to Remember 383 Review Questions MONOPOLY Unit IV MONOPOLY u Defining monopoly 387 u Characteristics of monopoly 388 u Pure, simple and discriminatory monopoly 388 u Entry barriers under monopoly 389 u Revenue curves under monopoly 390 u Equilibrium under monopoly 394 u Shifts in demand curve and absence of the supply curve 401 u Monopoly power and its measurement 402 u Rule of thumb 404 u Monopoly vs. perfect competition 404 u Social costs of monopoly power 407 u Price discrimination 409 Chapter in Brief 413 Formulas to Remember 415 Review Questions 416

10 I-20 Contents unit V IMPERFECT COMPETITION 15 MONOPOLISTIC COMPETITION u Introduction 419 u Characteristics of monopolistic competition 419 u Demand curve under a monopolistic market 422 u Selling Costs 423 u Firm s equilibrium under monopolistic competition 424 u Excess capacity theorem 426 u Monopolistic Competition and Economic Efficiency 426 u Comparison of monopolistic competition and perfect competition 428 Chapter in Brief 429 Review Questions OLIGOPOLY u Meaning of Oligopoly 431 u Characteristics of Oligopoly 432 u Barriers to entry 434 u Type of Oligopolies 435 u Cournot s Duopoly model 437 u Kinked demand curve and price determination 440 u Price leadership Model 444 u Types of price leadership 444 u The Dominant Firm Model 445 u Centralized cartels 447 u Prisoner s Dilemma 451 Chapter in Brief 453 Review Questions 455 Delhi University Paper MICRO-ECONOMICS-I B.COM.(HONS.) 457

Principles of Economics

Principles of Economics (8 th Edition) Dr. H. S. Agarwal Professor of Economics (Retd.) Agra College, AGRA professional publishing Contents JSASIC CONCEPTS^ 1. The Scope and Nature of Economics 1-31 Introduction;